University of Baltimore Law ReviewVolume 27Issue 1 Fall 1997 Article 7

1997

Notes: Sheets v. Brethren Mutual: Maryland's HighCourt Misconstrues CGL to Cover ExcludedEconomic Loss Caused by NegligentMisrepresentationGregory T. LawrenceUniversity of Baltimore School of Law

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Recommended CitationLawrence, Gregory T. (1997) "Notes: Sheets v. Brethren Mutual: Maryland's High Court Misconstrues CGL to Cover ExcludedEconomic Loss Caused by Negligent Misrepresentation," University of Baltimore Law Review: Vol. 27: Iss. 1, Article 7.Available at: http://scholarworks.law.ubalt.edu/ublr/vol27/iss1/7

SHEETS v. BRETHREN MUTUAL: MARYLAND'S HIGH COURT MISCONSTRUES CGL TO COVER EXCLUDED ECONOMIC LOSS CAUSED BY NEGLIGENT MISREPRESENTATION

I. INTRODUCTION............................................. 190 II. BACKGROUND ............................................... 193

A.

B.

c.

D.

E.

The Three Tiers of Policy Construction Under Mary-land Law ................................................ . The Duty to Defend Under Maryland Law .......... . 1. The Potentiality Rule ......................... . 2. The Exclusive Pleading Rule ............... . 3. The Comparison Test ........................ . Construction of Selected Terms in Liability Policies: "0 " & "Pw.-herty D " ccurrence ~ , vr amage ................. . 1. "Property Damage" ........................... . 2. "Occurrence" .................................. . The Tort of Negligent Misrepresentation Under Ma-ryland Law ............................................. . 1. Arm's Length Transactions .................. . 2. Limited to Statements of Fact. ............. . 3. Measure of Damages ......................... . 4. Reasonableness of Reliance ................. . The Duty to Defend Negligent Misrepresentation Claims ................................................... . 1. Majority Rule: Liability for Negligent Mis­

representations is not Covered Under CGLs ............................................. . a. Effect of "Premises Alienated" Exclu-

193 198 199 201 202

203 204 210

215 217 218 219 220

220

221

sion ........................................ 225 h. Effect of "Owned Property" Exclusion.. 226

2. Minority Position: Liability for Negligent Misrepresentations is Covered Under CGLs............................................... 227 a. Coverage Under BFE Advertising In-

jury Endorsement............... . . . . . . . . . . 229 h. Coverage Under Commercial Umbrella

Policy ...... .......... .... ..... ... ..... ..... 230

189

190 Baltimore Law Review [Vol. 27

c. Coverage for Common Law Fraud Under CeL ............................... 230

III. SHEETS v. BRETHREN MUTUAL.......................... 232 IV. ANALYSIS. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . .. . . . . .. . . 238

A. The Sheets Court Misconstrued the "Loss of Use" Prong to Cover Excluded Economic Loss... . . . . . . . . . . . 238

B. The Sheets Court Correctly Concluded CeLs Gener-ally Provide Coverage for Ordinary Negligence.. ..... 242

C. The Sheets Court Correctly Concluded Negligent Misrepresentations Constitute Accidents ............... 243

D. CeL Provisions That Could Enable Practitioners to Circumvent or Reinforce Sheets ....................... 244

E.. Impact of Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 V. CONCLUSION................................................ 248

I. INTRODUCTION

Liability insurance plays an essential role in modern society.) By pooling risk,2 insurers enable businesses to use funds that would otherwise be retained to self-insure against potential liability.3 Soci­ety in general benefits from liability insurance in at least two re-

1. One commentator opined that liability insurance is the lifeblood of capital­ism: "Cease [the] institution [of liability insurance] and every industrial wheel, from the watchmaker's tiny mainspring to the turbines of the power plant, will cease its revolutions. No manufacturer, railroader, fabricator, druggist or in­dustrialist will continue to risk his fortune." Melvin M. Belli, The Social Value of Liability Insurance, 13 HAsTINGS LJ. 169, 172 (1961); accord Peter J. Neeson & Phillip J. Meyer, The Comprehensive General Liability Policy and Its Business Risk Exclusions: An Overview, in REFERENCE HANDBOOK ON THE COMPREHENSIVE GEN· ERAL LIABIUTY POUCY: COVERAGE PROVISIONS, EXCLUSIONS, AND OTHER LITIGATION ISSUES 75,83 (Peter J. Neeson ed., 1995) ("[I]nsurance is an economic neces­sity without which industry could not function.").

2. For a summation of risk pooling techniques and pitfalls, see George Priest, The Current Insurance Crisis and Modern Tort Law, 96 YALE LJ. 1521, 1539-50 (1987).

3. See id. at 1539 ("Insurance provides a method for [insureds] to equalize the amount of money available to them over diverse states of the world-states in which losses occur and those in which there are no losses."); Laurie Vasichek, Note, Liability Coverage for 'Vamages Because of Property Damage" Under the Com­prehensive General Liability Policy, 68 MINN. L. REv. 795, 795 (1984); see also Terri D. Keville, Note, Advertising Injury Coverage: An Overview, 65 S. CAL. L. REv. 919, 921 (1992) ("Insurers are excellent loss spreaders because they are able to pool risk."); Priest, supra note 2, at 1542 ("[A]n insurer is an agent for the di­versification of risk.").

1997] Sheets v. Brethren Mutual 191

spects.4 First, an increase in the flow of money creates a more active economy.5 Second, insurers provide funds necessary to satisfy judg­ments.6 However, the relationships between insurers, insureds, and society do not exist in a vacuum. Poorly drafted policies7 and mis­guided judicial opinions8 undermine the arrangements, resulting in negative economic consequences such as steep premiums and cover­age curtailment.9 Thus, it is essential that insurers, insureds, practi­tioners, and judges all fully appreciate the scope and limitations of liability policies. 10

The primary vehicle of business liability insurance is the Com­prehensive/Commercial General Liability Insurance" Policy

4. Commentators have noted various additional ways society benefits from liabil­ity insurance. See, e.g., Priest, supra note 2, at 1540 n.101 (noting that insurers may persuade insureds to decrease risk); Keville, supra note 3, at 920 (noting insurance system's impact on the reduction of accidents by means of deter­rence).

5. See Vasichek, supra note 3, at 795 ("[C]ommodity prices decrease in propor­tion to the lower cost of protection, and psychological inhibition to expansion and innovation caused by gambling on the chance of liability are reduced.").

6. See id. at 795-96 (" [T] he public ... also is assured the continued protection of products liability law made viable by the availability of funds to pay judg­ments.").

7. See id. at 796 ("The efficacy of liability insurance is purely illusory ... when policies do not adequately delineate the liability risks transferred.").

8. See Keville, supra note 3, at 922 ("When courts find coverage where none was mutually intended, they further undermine the ability of insurers to predict future losses. This situation in tum makes it extremely difficult for insurers to price insurance accurately and fairly.").

9. Reduction in the availability of liability insurance may affect consumers, espe­cially those with low incomes. See Priest, supra note 2, at 1585-87.

10. If liability insurance is not conveyed clearly and interpreted correctly, it merely replaces the gamble of potential liability with the gamble of coverage. See Vasichek, supra note 3, at 796.

11. The Comprehensive General Liability Policy was renamed the "Commercial General Liability Policy" in 1986. See Keville, supra note 3, at 919 n.1, quoted in Bailer v. Erie Ins. Exch., 344 Md. 515, 533 n.5, 687 A.2d 1375, 1384 n.5 (1997). The name was changed because insurers believed the term "comprehensive" might invite courts to expand coverage beyond the parties' intentions. See id., cited in Bailer, 344 Md. 515, 533 n.5, 687 A.2d at 1384 n.5; cf George H. Tinker, Comprehensive General Liability Insurance-Perspective and Overview, 25 FEO'N INS. COUNS. Q. 217, 220 (1975). Prior to the renaming of the CGL, one commentator noted that the CGL "is 'comprehensive' only in the sense that it combines certain historic forms of coverage into an integrated whole .... [It] is not, and was never conceived to be, an 'all-risk' liability policy." Tinker, supra, at 220.

192 Baltimore Law Review [Vol. 27

(CGL).12 The CGL is a standardized form policy that provides both· liability and litigation protection for the insured. 13 The litigation protection, known as the "duty to defend," is important for two rea­sons. First, because litigation costs can be staggering, the duty to de­fend provides a substantial economic benefit to the insured. 14 Sec­ond, because there is no duty to defend unless a claim is potentially covered under the policy, duty to defend precedent serves as a bell­wether to the scope of coverage afforded by policies. 15

This Note examines the Maryland Court of Appeals's decision in Sheets v. Brethren Mutual Insurance CO.,16 a case which the United States Supreme Court found enlarged the scope of coverage af­forded by CGLs under Maryland law. 17 In Sheets, the court of ap­peals addressed whether a CGV8 provides coverage for damages

12. See, e.g., Robert M. Tyler, Jr. & Todd J. Wilcox, Pollution Exclusion Clauses: Problems in Interpretation and Application Under the Comprehensive General Liability Policy, 17 IDAHO L. REv. 497, 498 (1981) (noting that all types of business ven­tures use CGLs for liability protection); see also Steven E. Leder, Commercial General Liability, in SECOND ANNUAL INSURANCE LAw INSTITUTE C-l, C-l (Mary­land Institute for Continuing Professional Education of Lawyers, Inc. ed. 1997) ("The 'Commercial General Liability Policy' ... forms the backbone of liability protection for business owners.").

13. See Leder, supra note 12, at C-l. 14. One commentator opined that the duty to defend is one of the most impor­

tant benefits the insured receives in a standard liability policy. See Andrew Jan­quitto, Insurer's Duty to Defend in Maryland, 18 U. BALT. L. REv. 1, 53 (1988). The duty to defend is important to insurers because it enables them to gain control over the litigation and settlement process. See id. at 3.

15. See generally, e.g., Gov't Employees Ins. Co. v. Ropka, 74 Md. App. 249, 257, 536 A,2d 1214, 1218 (1988) ("It is generally true that an insurer has no duty to de­fend a cause of action against an insured if that cause of action asserts liability on the part of the insured that comes within an exclusion in the insurance policy.").

16. 342 Md. 634, 679 A.2d 540 (1996). 17. See Lords Landing Village Condominium Council of Unit Owners v. Continen­

tal Ins. Co., 117 S. Ct. 1731, 1733 (1997) (per curiam) (remanding insurance coverage case back to the United States Court of Appeals for the Fourth Cir­cuit in light of Sheets).

18. The policy at issue in Sheets was a farm owner's general liability policy. See Sheets, 342 Md. at 638, 679 A.2d at 54142. Farm owner's liability insurance is merely a slightly modified CGL. See generally 7A JOHN AlAN APPLEMAN. INSUR· ANCE LAw AND PRACTICE § 4501.17, at 292 (Walter F. Berdal ed. 1979) (noting that farm owner's policies should be construed substantially the same as other liability policies and calling this type of policy a "comprehensive farm liability policy"); 1 ROWLAND H. LONG. THE LAw OF LIABILITY INSURANCE § 3.07[10] (1992) (noting that the distinction between a standard CGL and a farm owner's policy is the definition of the term "insured").

1997] Sheets v. Brethren Mutual 193

arising from negligent misrepresentations. 19 In deciding this issue, the court made the following conclusions of Maryland insurance law: (1) ordinary negligence constitutes an "accident" if the insured neither expected nor intended the resulting damage;20 (2) negligent misrepresentation constitutes an "accident" if the insured neither foresaw nor expected the resulting damage;21 and (3) loss of use of a defective septic system constituted property damage under the so called "loss of use" prong.22

Part II of this Note examines the underpinnings of the Sheets opinion: the rules governing construction of insurance contracts, the duty to defend, the judicial gloss placed on selected terms in the CGL ("occurrence" and "property damage"), the tort of negli­gent misrepresentation, and a survey of jurisdictions that already have addressed whether CGLs cover damages caused by negligent misrepresentations. Part III of this Note provides a detailed account of the facts, holding, rationale, and dissent in Sheets. In Part IV, this Note contends that Sheets was wrongly decided because the court of appeals misconstrued the loss of use prong to provide coverage for economic loss of the sort not covered under CGLs. This Note fur­ther contends that two policy exclusions, which were neither raised by the insurer nor considered by the Sheets court, precluded cover­age for the underlying claim: the "loss of use" and "premises alien­ated" exclusions.23 Conversely, this Note concludes that the Sheets majority clarified the murky distinctions regarding the term "acci­dent," correctly concluding that ordinary negligence and negligent misrepresentations could constitute an accident, provided that the insured did not subjectively intend or expect the resulting damage.

II. BACKGROUND

A. The Three Tiers of Policy Construction Under Maryland Law

Unlike some jurisdictions, Maryland courts purport not to con-

19. See Sheets, 342 Md. at 636-37, 679 A.2d at 541. The underlying suit settled before the case reached the Court of Appeals of Maryland. See id. at 638, 679 A.2d at 542. Because the terms of settlement were not available, the court of appeals only addressed the duty to defend, not the duty to indemnify. See id.

20. See id. at 652, 679 A.2d at 548. 21. See id. at 657, 679 A.2d at 551 (quoting Harleysville Mut. Cas. Co. v. Harris &

Brooks, Inc., 248 Md. 148, 154, 235 A~2d 556, 559 (1967». 22. See id. at 645, 679 A.2d at 545. 23. This Note also raises the issue of whether a third exclusion, the "owned prop­

erty" exclusion, also precluded coverage.

194 Baltimore Law Review [Vol. 27

strue insurance policies most strongly against the insurer.24 Rather,

24. See, e.g., Cheney v. Bell Nat'l Life Ins. Co., 315 Md. 761, 766, 556 A.2d 1135, 1138 (1989). The Cheney court declared, "Maryland does not follow the rule, adopted in many jurisdictions, that an insurance policy is to be construed most strongly against the insurer." Id. However, it is unclear which rule of construction adopted in other jurisdictions the court of appeals was referring to when it distinguished Maryland law from other jurisdictions.

There are two primary doctrines of insurance law construction that courts generally use to construe policies against insurers: the doctrine of contra profer­entum and the doctrine of reasonable expectations. With certain qualifications, the doctrine of contra proferentum directs that courts construe ambiguous policy terms against the insurer as drafter of the policy. See, e.g., Bailer v. Erie Ins. Exch., 344 Md. 515, 522, 687 A.2d 1375, 1378 (1997) (construing ambiguous terms against an insurer only if ambiguity remains after considering extrinsic evidence). See generally, 2 LEE R Russ, COUCH ON INSURANCE § 22:18 (3d ed. Supp. 1996) ("[T]he doctrine of contra proferentum . .. construes the policy against [the] insurance company .... "). In some form, the doctrine of contra proferentum is the law in every state and the District of Columbia. See Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 538-39 (9th Cir. 1990); see also 13 JOHN ALAN APPLEMAN & JEAN APPLEMAN, INSURANCE LAw AND PRACTICE § 7401, at 197 n.1 (1975) (noting near unanimity of courts applying the doctrine of contra proferentum). See generally Michael B. Rappaport, The Ambiguity Rule and Insurance Law: Why Insurance Contracts Should Not Be Construed Against the Drafter, 30 GA. L. REv. 171, 173 n.2 (1995) (noting that the doctrine of contra proferentum is also known as the "ambiguity rule"). One factor that distin­guishes whether a jurisdiction is more or less favorable to insurers is how ag­gressively courts in that jurisdiction invoke the doctrine of contra proferentum. See JEFFREY W. STEMPEL, INTERPRETATION OF INSURANCE CONTRACTS § 5.8, at 196-97 (1994) (separating jurisdictions into three categories: "strong," "moderate," and "weak").

The second doctrine of construction, the doctrine of reasonable expecta­tions, directs that "objectively reasonable expectations of [insureds] regarding terms of insurance contracts will be honored even though [a] painstaking study of the policy provisions might have negated those expectations." Robert

. E. Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 HARv. L. REv. 961, 967 (1970). The doctrine of reasonable expectations is the law in ap­proximately half of the states; Maryland courts do not apply this doctrine. See STEMPEL, supra, § ILl, at 312 & n.8.

In a dispute over a manuscript policy, Maryland law is arguably more favorable to the insured than jurisdictions that more readily construe policies against the insurer. See generally 2 Russ, supra, § 22:18. A manuscript policy contains provisions that are specifically negotiated between the insurer and the insured, i.e., the policy is not a standard form policy. See Maryland Cas. Co. v. Armco, Inc., 822 F.2d 1348, 1350 (4th Cir. 1987) (noting that the policy at issue was " 'manuscript' in several instances: that is, some provisions are ne­gotiated and specifically written for this insured"), cited with disapproval in Bausch & Lomb, Inc. v. Utica Mut. Ins. Co., 330 Md. 758, 781, 625 A.2d 1021, 1032 (1993) (disagreeing with the Armco court's construction of the term

1997] Sheets v. Brethren Mutual 195

courts construe insurance policies, like other contracts, as a whole to effectuate the intentions of the parties.25

There are roughly three tiers of analysis for construing Insur­ance policies under Maryland law: (1) determining whether terms are ambiguous and construing unambiguous terms without refer­ence to extrinsic evidence; (2) construing ambiguous terms by con­sidering extrinsic evidence, looking first to persuasive authority from other jurisdictions that have already construed the term; and (3) construing terms that remain ambiguous against the insurer as drafter of the document.

In the first tier of analysis, Maryland courts attempt to confine their inquiry to the language in the policy.26 Unless expressly de­fined in the policy, words are given their customary meaning, mea­

. sured by the reasonable expectations of the prudent layperson.27

"damages"). In at least one jurisdiction that readily construes policies against the insurer, courts do not construe the manuscript policies against the insurer even if the terms are ambiguous. See Koch Eng'g Co. v. Gilbraltar Cas. Co., 878 F. Supp. 1286, 1288 (E.D. Mo. 1995) (applying Missouri law; reasoning that manuscript policies should not be construed against insurers because they are negotiated between two equal parties on a level playing field). Conversely, Maryland law makes no such distinction. If ambiguity remains after consider­ing extrinsic evidence, Maryland courts construe the policy against the insurer as drafter of the document regardless of whether the policy is a manuscript policy or a standard form policy. See Cheney, 315 Md. at 766-67, 556 A.2d at 1138; see also, e.g., Armco, 822 F.2d at 1350-53 (construing manuscript policy by applying Maryland law without special rules of construction).

25. See Pacific Indem. Co. v. Interstate Fire & Cas. Co., 302 Md. 383, 388, 488 A.2d 486, 488 (1985); Bond v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 289 Md. 379, 384, 424 A.2d 765, 768 (1981); see also Sullins v. Allstate Ins. Co., 340 Md. 503, 508,667 A.2d 617, 619 (1995); Aragona v. St. Paul Fire & Marine Ins. Co., 281 Md. 371,-375, 378 A.2d 1346, 1348 (1977). But if. George K. Hartwick, How to Read a Liability Insurance Policy, 13 HAsTINGS LJ. 175, 175 (1961) ("An insur­ance policy is of course a contract; but it is no longer possible to approach an insurance problem simply by resorting to the law of contracts. A substantial body of law has developed which is particularly applicable to contracts of in­surance, and different from that applicable to contracts generally.").

26. See Pacific Indem. Co., 302 Md. at 389, 488 A.2d at 489; see also Board of Trust­ees of State Colleges v. Sherman, 280 Md. 373, 380, 373 A.2d 626, 629 (1977) ("[W]here a contract is plain and unambiguous, there is no room for con­struction, and it must be presumed that the parties meant what they ex­pressed .... ").

27. See Bausch & Lomb, 330 Md. at 779, 625 A.2d at 1031; Cheney, 315 Md. at 766, 556 A.2d at 1138; see also Simkins Indus., Inc. v. Lexington Ins. Co., 42 Md. App. 396, 405, 401 A.2d 181, 186 (1979) (stating that courts should view terms from the perspective of a "reasonably prudent person applying for insurance, rather than from view of lawyer"); if. Catalina Enters., Inc. Pension Trust v.

196 Baltimore Law Review [Vol. 27

However, if evidence shows that the parties intended to employ a term in a specialized or technical sense, the court should proceed to the second tier of analysis.28

In determining reasonable expectations, one factor courts con­sider is the purpose of the contract.29 Courts also examine the pol­icy's character, as well as the facts and circumstances at the time of execution.3D Terms in insurance policies must be read in the context of the entire document, not according to <;lny single clause, phrase,

. or section.31 The terms control unless they violate a statute, regula­tion, or public policy.32 Absent controlling authority, Maryland courts faced with construing a new term or provision must inquire: "What is the customary and normal meaning of [the term] in the context of [the type of policy being construed]?"33

The Court of Appeals of Maryland has used three sources to as­certain the customary and normal meaning of policy terms: "Web­ster's Dictionary, Random House Dictionary, [and], less often, Black's

Hartford Fire Ins. Co., 67 F.3d 63, 66 (4th Cir. 1995) ("It is axiomatic under Maryland law that a court should avoid reading [an insurance] contract in a way that produces an absurd result, especially when a reasonable interpreta­tion is available.").

28. See Sullins, 340 Md. at 508, 667 A.2d at 619 (stating that words are given their ordinary meaning "unless there is an indication that the parties intended to use the words in a technical sense").

29. See Collier v. MD-Individual Practice Ass'n, 327 Md. 1, 6, 607 A.2d 537, 539 (1992) ("One factor in determining the ordinary and accepted meaning of a contract term is the purpose of the contract. ").

30. See Pacific Indem. Co., 302 Md. at 388, 488 A.2d at 488. 31. See Teamsters Local 639-Employers Health Trust v. Reliable Delivery Serv., Inc.,

42 Md. App. 485, 488-89, 401 A.2d 191, 194 (1979), cited in Catalina, 67 F.3d at 66.

32. See, e.g., Mutual Fire, Marine & Inland Ins. Co. v. Vollmer, 306 Md. 243, 250, 508 A.2d 130, 133 (1986). The court of appeals has been reluctant to void cov­erage on the grounds that it is against public policy. See generally, e.g., Bailer v. Erie Ins. Exch., 344 Md. 515, 535, 687 A.2d 1375, 1385 (1997) (holding that in­suring against intentional invasion of privacy is not against public policy); First Nat'l Bank of St. Mary's v. Fidelity & Deposit Co., 283 Md. 228, 24143, 389 A.2d 359, 366-67 (1978) (holding that insuring against punitive damages is not against public policy).

33. Collier, 327 Md. at 6, 607 A.2d at 539. In Collier, the court of appeals stated, "In the absence of a controlling legal definition ... the question becomes, 'What is the customary and normal meaning of "full-time student" in the con­text of a group health insurance policy?' " Id.; cf. Bausch & Lomb, 330 Md. at 779,625 A.2d at 1031 ("A word's ordinary signification is tested by what mean­ing a reasonably prudent layperson would attach to the term.").

1997] Sheets v. Brethren Mutual 197

Law Dictionary. "34 Correspondingly, ambiguities arise if a reasonably prudent layperson would conclude that the language is susceptible to more than one meaning.35 Conflicting judicial interpretations in other jurisdictions are evidence of ambiguity.36 However, terms in an insurance policy may be ambiguous in one context and not in anotherY

In the second tier of analysis, Maryland courts construe ambig­uous terms by considering extrinsic evidence.38 Judicial construction of the term in other jurisdictions is the first level of extrinsic evi­dence a court consults when faced with an ambiguity.39 Precedents from other jurisdictions provide guidance for construing ambiguous terms because, like states that adopt uniform statutes, parties adopt­ing an insurance policy that has been construed across the nation adopt the policy with the construction it has received in other states.40 Indeed, while a court may find a term ambiguous on its

34. Pacific Indem. Co, 302 Md. at 388, 488 A.2d at 488. 35. See, e.g., Truck Ins. Exch. v. Marks Rentals, Inc., 288 Md. 428, 433, 418 A.2d

1187, 1190 (1980); Pacific Indem. Co., 302 Md. at 338, 488 A.2d at 489 ("The language used may be ambiguous if it is 'general' and may suggest two mean­ings to a reasonably prudent layperson."). For an in-depth discussion of ambi­guity, see Rappaport, supra note 24, at 178-87.

36. See Sullins v. Allstate Ins. Co., 340 Md. 503, 518, 667 A.2d 617, 624 (1995) (" [I]f other judges [from other jurisdictions] have held alternative interpreta­tions of the same language to be reasonable, that certainly lends some credence to the proposition that the language is ambiguous and must be re­solved against the drafter."). Nevertheless, Maryland courts must still under­take an independent inquiry to determine whether a term is ambiguous. See id. at 517-18, 667 A.2d at 624 (noting that a court would be abdicating its judi­cial role if it did not engage in an independent inquiry despite authority from other jurisdictions).

37. See, e.g., Sullins; 340 Md. at 508, 667 A.2d at 619. In Sullins, for example, the court of appeals held that a "pollution exclusion" clause was ambiguous as afr plied to lead paint, see id. at 516, 667 A.2d at 623, thereby implying that the clause unambiguously excluded coverage for chemical spills. See id. at 516 n.2, 667 A.2d at 622 n.2 (noting that most cases upholding application of the pol­lution exclusion involved "environmental exposure").

Regarding exclusions, the Court of Appeals of Maryland declared, "If the exclusion totally swallows the insuring provision, the provisions are completely contradictory. That is the grossest form of ambiguity ... [and the insurer] would be obligated to defend and indemnify." Bailer, 344 Md. at 525, 687 A.2d at 1380.

38. See, e.g., id. at 508, 667 A.2d at 619. 39. See Pacific Indem. Co., 302 Md. at 401, 488 A.2d at 495. 40. See id. This rule was adopted by the court of appeals in Stanely v. American Mo­

torists Insurance Co., 195 Md. 180, 188,73 A.2d 1,4 (1950). The Stanely court

198 Baltimore Law Review [Vol. 27

face, the court may nonetheless treat the term as unambiguous and adopt the construction placed on it by courts in other states.41

If no court has construed the term in a similar situation, or if there are conflicting constructions from other jurisdictions, the court then considers extrinsic evidence offered by the parties.42 In reality, however, useful extrinsic evidence is often unavailable. 43 A court construes the policy as a matter of law if there is no dispute of fact regarding the extrinsic evidence.44 However, if there is a ma­terial dispute of fact pertaining to construction of the policy, it must be resolved at tria1.45

If no extrinsic evidence is offered that clarifies the ambiguity, courts proceed to the third tier.46 In the third tier, courts construe the policy against the insurer as drafter of the document.47 Again, either of two contingencies must have occurred to arrive at this tier: (1) the term was ambiguous and the parties did not offer extrinsic evidence to clarify the ambiguity; or (2) the term was ambiguous and resort to extrinsic evidence failed to clarify the ambiguity.

B. The Duty to Defend Under Maryland Law

Under CGLs, the insurer is obligated to provide both litigation and liability protection to the insured.48 The protection afforded by

reasoned that this rule is a useful one, and, with respect to the insurer, it may be regarded as fact. See id. at 189, 73 A2d at 4. Presumably, the Stanely court recognized that insurers, mostly multi-state businesses, would be privy to inter­pretations by courts in other states.

41. See Fisher v. Tyler, 284 Md. 100, 106-07, 394 A2d 1199, 1203 (1978) ("[W]hile the contract term on its face may be ambiguous, which under other circum­stances would ordinarily generate a jury question, the court in this situation may treat the term as unambiguous and, absent any factual dispute, adopt, as a matter of law, that construction placed on the language by the courts of other states.").

42. See Pacific Indem. Co., 302 Md. at 389, 488 A2d at 489. For example, the con­struction placed on the policy by both parties before the dispute arose serves as an important aid to courts construing policies. See, e.g., Hurt v. Pennsylvania Threshermen & Farmers' Mut. Cas. Ins. Co., 175 Md. 403, 407, 2 A2d 402, 404 (1938).

43. See STEMPEL, supra note 24, § 5.2, at 182. 44. See Pacific Indem. Co., 302 Md. at 389, 488 A2d at 489. 45. See id. 46. See id. at 405, 488 A.2d at 497. 47. See id. This doctrine of construction is known as the doctrine of contra proferen·

tum. See supra note 24. 48. See, e.g., Brohawn v. Transamerica Ins. Co., 276 Md. 396, 409-10, 347 A2d 842,

851 (1975); Janquitto, supra note 14, at 1-2.

1997] Sheets v. Brethren Mutual 199

the insurer's duty to defend is sometimes referred to as "litigation insurance. "49 Notably, the duty to defend is not a product of com­mon law.50 Rather, it is a contractual obligation, presumably bar­gained for between the parties.51

1. The Potentiality Rule

The CGL duty to defend clause provides as follows: "[T] he company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false, or fraudulent .... "52 Under Maryland law, this clause has been interpreted as imposing a duty to provide a legal defense if there is a potentiality that the policy may cover a claim asserted against the insured. 53 If both claims covereci under the pol­icy and claims outside the policy are asserted against the insured, the insurer is usually obligated to provide a defense for all of the claims.54

49. See Brohawn, 276 Md. at 410, 347 A.2d at 851 (referring to International Paper Co. v. Continental Cas. Co., 320 N.E.2d 619, 621 (N.Y 1974»; Janquitto, supra note 14, at 4 (" [L]iability insurance ... is in reality litigation insurance as well. ").

50. See Riviera Beach Volunteer Fire Co. v. Fidelity & Cas. Co., 388 F. Supp. 1114, 1120 (D. Md. 1975); Janquitto, supra note 14, at 3 (citing, e.g., Steyer v. Westvaco Corp., 450 F. Supp. 384, 389 (D. Md. 1978».

51. See Brohawn, 276 Md. at 409-10, 347 A.2d at 851; see also All-Star Ins. Corp. v. Steel Bar, Inc., 324 F. Supp. 160, 163 (N.D. Ind. 1971); Janquitto, supra note 14, at 3; cj. Steyer, 450 F. Supp. at 394 (refusing to find a duty to defend where the policy explicitly disclaimed such duty). In Brohawn, the court of appeals noted that both the insurer and the insured have a vested interest in securing the duty to defend. See Brohawn, 276 Md. at 409-10, 347 A.2d at 851. The in­sured's interest is obvious-it protects the insured from the burden of paying for a legal defense. See id. at 409, 347 A.2d at 851. The insurer's interest is in controlling litigation that could result in its duty to indemnify. See id. at 410, 347 A.2d at 851.

52. 7C APPLEMAN. SUPRA note 18, § 4682, at 22 n.9 (1978 CGL); Leder, supra note 12, at C-87 (1973 CGL).

53. See Sullins v. Allstate Ins. Co., 340 Md. 503, 509, 667 A.2d 617, 619-20 (1995); Aetna Cas. & Sur. Co. v. Cochran, 337 Md. 98, 102, 651 A.2d 859, 861 (1995); Brohawn, 276 Md. at 408, 347 A.2d at 850.

54. See, e.g., Southern Md. Ass'n v. Bituminous Cas. Corp., 539 F. Supp. 1295, 1299 (D. Md. 1982) (applying Maryland law; discussing Steyer, 450 F. Supp. at 389); see also Janquitto, supra note 14, at 39-40 (noting that the insurer can provide a partial defense if legal costs can readily be apportioned between covered and noncovered claims); cj., e.g., Aetna Cas. & Sur. Co. v. Spancrete of III.,

200 Baltimore Law Review [Vol. 27

The court of appeals fully articulated the "potentiality rule" in Brohawn v. Transamerica Insurance Co. 55 The Brohawn court stated that under a standard duty to defend provision, an insurer is obligated to defend "if there is a potentiality that the claim could be covered by the policy."56 Accordingly, the Brohawn court held that despite the insured's guilty plea to criminal assault, the insurer was obli­gated to defend against a negligence claim arising from the same occurrence, notwithstanding a clause in the policy excluding cover­age for intentional acts.57 The court reasoned that this was logical because the guilty plea was not binding on the jury in the civil suit.58 Thus, the jury could have found that the insured's actions were negligent, as opposed to intentional, and, therefore, covered under the policy.59 As the results in Brohawn and its progeny make clear, the duty to defend under the potentiality rule is a low thresh-

Inc., 726 F. Supp. 204, 207 (N.D. Ill. 1989) (stating that under Illinois law, so long as one of the grounds for recovery is potentially covered, an insurer must provide the defense against the entire complaint even if one of the theo­ries of recovery is explicitly excluded).

55. 276 Md. 396, 347 A.2d 842 (1975). In Maryland, the potentiality rule was first announced in United States Fidelity & Guaranty Co. v. National Paving & Con­tracting Co., 228 Md. 40, 54, 178 A.2d 872, 879 (1962). See also Janquitto, supra note 14, at 11 n.53.

56. Brohawn, 276 Md. at 408, 347 A.2d at 850 (citing National Paving & Contracting Co., 228 Md. at 54, 178 A.2d at 872).

57. The policy excluded, however, " 'any act committed by ... the Insured with intent to cause injury or damage to person or property.' " Id.

58. See id. at 403-04, 347 A.2d at 848 (noting that the insured would have an op­portunity to explain a guilty plea to the jury in a civil suit).

59. See id. The Brohawn court also considered whether it was appropriate for a court to fully adjudicate the insurer's obligations under the policy in relation to the pending, underlying tort action. See id. at 404-07, 347 A.2d at 848-50. The court held that if the issues presented in a declaratory judgment action are independent and separable from those in the underlying tort suit, the trial court may exercise its discretion in entertaining a suit to determine pol­icy coverage. See id. at 405, 347 A.2d at 848-49 (noting, e.g., the issue of whether insured paid policy premiums would generally be appropriate for de­termination in a declaratory judgment action). Conversely, if the issues raised in a declaratory judgment action to determine the extent of coverage would require addressing ultimate issues of fact which are also at issue in the pend­ing, underlying suit by a third party, a declaratory judgment action would be inappropriate. See id. at 406-07, 347 A.2d at 848-49 (noting that the effect would be to force the insured to defend "against the vast resources and exper­tise of her insurer who would be trying to prove that which was its contractual duty to disprove").

1997] Sheets v. Brethren Mutual 201

old to satisfy.60

2. The Exclusive Pleading Rule

The potentiality rule is closely tied to the "exclusive pleading rule." The exclusive pleading rule directs that courts look only to the plaintiff's complaint in the underlying suit to determine the in­surer's duty to defend.61 Under Maryland law, however, the exclu­sive pleading rule is a one-way street.62 In Aetna Casualty & Surety Co. v. Cochran,63 the court of appeals limited the application of the ex­clusive pleading rule to insurers only by extending the potentiality rule to encompass affirmative defenses made by the insured.64

The Cochran court addressed whether an insured's affirmative defense of self-defense potentially placed the underlying claims for assault, battery, and loss of consortium within the policy coverage.65

The policy excluded claims for injury or damage "expected or in­tended from the standpoint of the 'insured,' " but included claims for harm "resulting from the use of reasonable force to protect per­sons or property."66 Thus, the court held that the insurer was obli­gated to provide a defense because the insured's answer to the com­plaint potentially brought the claim within the insurer's duty to

60. See generally, e.g., Sullins v. Allstate Ins. Co., 340 Md. 503, 518, 667 A.2d 617, 624 (1995) (holding that a lead paint claim was not encompassed within the pollution exclusion clause); Janquitto, supra note 14, at 16 (" [T]he duty to de­fend exists unless it can be conclusively shown as a matter of law that there is no possible factual or legal basis on which the insurer may eventually be found liable under its duty to indemnify.").

61. See, e.g., Brohawn, 276 Md. at 408, 347 A.2d at 850 (quoting Lee v. Aetna Cas. & Sur. Co., 178 F.2d 750, 751-52 (2d Cir. 1949) (Learned Hand, CJ.». Lee is noted as being the most cited case for the exclusive pleading rule. See Jan­quitto, supra note 14, at 7. In Lee, the court declined to relieve an insurer from its duty to defend, notwithstanding that the insurer had information outside of the complaint conclusively establishing that the underlying claim fell within a policy exclusion. See Lee, 178 F.2d at 752-53. Notably, the Lee court sustained the denial of the insurer's duty to indemnify the insured using the extrinsic evidence; in other words, coverage was excluded but the insurer nev­ertheless had a duty to defend. See id.; see also Janquitto, supra note 14, at 8 n.38.

62. See Aetna Cas. & Sur. Co. v. Cochran, 337 Md. 98, 112, 651 A.2d 859, 866 (1995).

63. 337 Md. 98, 651 A.2d 859 (1995). 64. See id. at 111-12, 651 A.2d at 866. 65. See id. at 100, 651 A.2d at 860. 66. Id. at 101, 651 A.2d at 861.

202 Baltimore Law Review [Vol. 27

indemnify.67 The court added that extrinsic evidence proffered by the insured will trigger coverage under the potentiality rule only if the insured can demonstrate that "there is a reasonable potential that the issue triggering coverage will be generated at trial "68

3. The Comparison Test

When applying the potentiality and exclusive pleading rules, Maryland courts engage in a two-step inquiry69 known as the "com­parison test. "70 This analytical framework was first prescribed in St. Paul Fire & Marine Insurance Co. v. Pryseski.71 First, the court ascer­tains "what is the coverage and what are the defenses under the terms and requirements of the insurance policy."72 The court then determines if "the allegations in the [underlying] tort action poten­tially bring the tort claim within the policy's coverage. "73 In dicta, the Pryseski court noted that the potentiality rule usually becomes relevant only in the second step of the comparison test.74

The Pryseski court's indication that the potentiality rule might become relevant in the first step of the comparison test created confusion within the Maryland legal community.75 In Northern Assur­ance Co. of America v. EDP Floors, Inc.,76 the court of appeals re­sponded to this confusion by disavowing its dicta in Pryseski.77 The Northern Assurance court declared that applying the potentiality rule in the first step, whereby the court determines the scope of the in­surer's duty to indemnify, "would in effect create a canon of insur-

67. See id. at 112, 651 A.2d at 866. The court's holding, though premised on the insured's affirmative defense, is more accurately based on the sufficiency of the insured's representations to the insurer that the underlying actions were in self-defense. See id. at 101 n.2, 651 A.2d at 861 n.2 (noting that the record before the court of appeals did not contain the insured's answer in the under­lying suit).

68. [d. at 112, 651 A.2d at 866 (noting that the insured cannot simply assert frivo­lous defenses to trigger the duty to defend).

69. See Cochran, 337 Md. at 103-04, 651 A.2d at 862; St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187, 193,438 A.2d 282, 285 (1981).

70. See, e.g., Janquitto, supra note 14, at 17. 71. See Pryseski, 292 Md. at 193~94, 438 A.2d at 285. 72. [d. at 193, 438 A.2d at 285. 73. [d. 74. See id. at 193-94, 438 A.2d at 285. 75. See Janquitto, supra note 14, at 20 (noting that Pryseski court's qualification

that the potentiality test may become relevant in the first step "has created abundant confusion").

76. 311 Md. 217,533 A.2d 682 (1987). 77. See id. at 226, 553 A.2d at 686.

1997] Sheets v. Brethren Mutual 203

ance contract interpretation that gives every benefit of doubt to the insured, in contravention of our many holdings that the unambigu­ous language in an insurance contract is to be afforded its ordinary and accepted meaning. "78 Hence, the comparison test now simply stands as an analytical framework rather than a rule of insurance policy construction. The first step involves application of the rules of construction in determining the scope of coverage-not whether a court can construe the policy so as to raise a potentiality of cover­age.79 The second step involves whether, given the construction pro­duced in the first step, there is a potentiality that the insurer will be required to indemnify the insured.80

C. Construction of Selected Terms in Liability Policies: "Occurrence" & "Property Damage"

Under the second step of the comparison test, a court deter­mines whether the allegations in the underlying tort suit potentially fall within the scope of the insurer's duty to indemnify.81 The liberal pleading practice in Maryland and most jurisdictions complicates this inquiry because plaintiffs need not plead their cause of action with specificity.82 Therefore, the second step in the comparison test often requires examining the elements of the cause of action al­leged in the plaintiff's complaint and determining whether the alle­gations allege liability potentially covered under the policy.

Any meaningful analysis of the second step of the comparison test must account for the scope of coverage adduced in the first step.83 Thus, for analysis purposes, this Note centers its inquiry on

78. [d. 79. See Janquitto, supra note 14, at 22. 80. See id. 81. See St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187, 393-94, 438 A.2d

283, 285 (1981). 82. See 7C APPLEMAN, supra note 18, § 4683, at 55 (stating that federal pleadings

may not provide enough information to make an informed judgment con­cerning the duty to defend). One commentator noted that despite different standards between the federal and Maryland pleading rules, Maryland's plead­ing practice also causes difficulty because it permits parties to plead in the al­ternative. See Janquitto, supra note 14, at 38 (comparing FEn. R CIV. P. 8 (no­tice pleading) with MD. RULE 2-303 (modified notice pleading». The same commentator also suggested that an insurer faced with ambiguous pleadings should consider assuming the defense under a reservation of rights and make a motion for a more definite statement to properly assess the underlying facts. See id. at 39.

83. See supra notes 69-80 and accompanying text for a discussion of the com pari-

204 Baltimore Law Review [Vol. 27

the coverage agreement in the CGL.84 With minor changes depending on the version, the CGL cover-

age agreement provides:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damage because of

A. bodily injury or B. property damage

to which this insurance applies, caused by an occurrence 85

Under the first step of the comparison test, a court construing this provision would determine that the insurer has an obligation to indemnify the insured if the following two conditions exist: (1) bod­ily injury or property damage, (2) caused by an occurrence.86

1. "Property Damage"

Judicial construction of the term "property damage" has been somewhat unpredictable.87 Prior to 1966, the CGL provided that property damage was "injury to or destruction of property."88 Courts construed this to encompass liability for intangible rights and obli­gations89 such as economic losses.9o In an effort to hedge this unin-

son test. 84. See 7C APPLEMAN, supra note 18, § 4682, at 22 n.9 (1978 CGL); see also David S.

Garbett, Comment, The Duty to Defend Clause in a Liability Insurance Policy: Should the Exclusive Pleading Test be Replaced?, 36 U. MIAMI L. REv. 235, 236 n.2 (1982) (noting that all liability policies contain substantially the same indem­nity and duty to defend clauses).

85. 7C APPLEMAN, supra note 18, § 4682, at 22 n.9 (1978 CGL); Tinker, supra note 11, at 238 (1973 CGL); Leder, supra note 12, at C-87 (1973 CGL). See Tinker, supra note 11, at 220-21, for a brief discussion of the history and origin of the CGL. For an outline of the various provisions in a CGL, including judicial construction of the terms by Maryland courts, see Leder, supra note 12, at C-l to C-72. See also Phillips L. Goldsborough & Jon H. Grube, The Comprehensive General Liability Policy & Related Coverages, in SELECTED PROBLEMS IN INSURANCE

LAw 1, 11-37 (Maryland Institute for Continuing Professional Education of Lawyers, Inc. ed., 1983).

86. Gj, e.g., Sheets v. Brethren Mutual Ins. Co., 342 Md. 634, 64143, 679 A.2d 540, 54344 (1996) (applying the first step of the comparison test to identical policy terms and producing the same scope of an insurer's duty to indemnify).

87. See Leder, supra note 12, at C-8 (explaining the history of redrafting the CGL in response to judicial misconstruction of the term "property damage").

88. Id. 89. See id.; Hauenstein v. Saint Paul-Mercury Indem. Co., 65 N.W.2d 122, 125

1997] Sheets v. Brethren Mutual 205

tended construction, drafters added the word "tangible" to the defi­nition of "property damage."91 Nevertheless, courts continued to hold that CGLs covered economic 10sses.92 Finally, in 1973 .the draft­ers amended the definition to require "physical injury to or destruc­tion of tangible property. "93 This change was fairly effective in ex­cluding coverage for economic 10ss.94

Since 1973, the CGL has also defined "property damage" to in­clude the "loss of the use of tangible property that is not physically injured."95 Commentators have noted that this "loss of use" prong provides a narrow scope of coverage.96 Indeed, this prong provides a narrow window of coverage for economic 10ss.97 The classic example

(Minn. 1954) (holding that diminution in value is covered property damage under CGL).

90. See Leder, supra note 12, at C-8 ("[P]urely economic loss was not intended to be covered by [CGL] underwriters."). "[E]conomic loss is loss of an expec­tancy interest created by contract .... " Michael R. McCann, Note, Atlantis Re­visited: Recovery Under Maryland Law for Purely Economic Loss Against Negligent Builders and Manufacturers, 23 U. BALT. L. REv. 521. 522 (1994). "Economic loss includes such things as the loss of value or the use of the product itself, the cost to repair or replace the product, or the lost profits resulting from the loss of use of the product." AJ. Decoster Co. v. Westinghouse Elec. Corp., 333 Md. 245, 250, 634 A.2d 1330, 1332 (1994); see also McCann, supra, at 522.

91. See Leder, supra note 12, at C-8. 92. See id. (citing United States Fidelity & Guar. v. Nevada Cement Co., 561 P.2d

1335 (Nev. 1977». 93. See id. 94. See, e.g., Sting Sec., Inc. v. First Mercury Syndicate, Inc., 791 F. Supp. 555, 562

(D. Md. 1992) (applying Virginia law); Kartridg Pak Co. v. Travelers Indem. Co., 425 N.W.2d 687, 689 (Iowa Ct. App. 1988) (recognizing that 1973 revision of CGL, inserting the term "physical injury" into the definition of "property damage," restricted coverage for intangible losses); see also John P. Arness & Randall D. Eliason, Insurance Coverage for ''Property Damage" in Asbestos and Other Toxic Tort Cases, 72 VA. L. REv. 943, 963 (1986) ("Courts have interpreted the [1973 CGL] requirement of physical injury ·rather strictly."); Herbert J. Bauman, Broad Form Property Liability Coverage: An Overview, in REFERENCE HAND­BOOK ON THE COMPREHENSIVE GENERAL LlABIUTY POUCY: COVERAGE PROVISIONS, EXCLUSIONS, AND OTHER LITIGATION ISSUES 117, 125-26 (Peter J. Neeson ed. 1995).

95. E.g., Arness & Eliason, supra note 94, at 962-63 (quoting 1973 eGL); Bauman, supra note 94, at 125 (same); accord Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 641, 679 A.2d 540, 543 (1996).

96. See, e.g., Arness & Eliason, supra note 94, at 967-68; Goldsborough & Grube, supra note 85, at 17-18.

97. Cf. Arness & Eliason, supra note 94, at 960 (" [T]he claim for loss of use is one for loss of intangible property-profits."). See generally AJ. Decoster Co. v. Westinghouse Elec. Corp., 333 Md. 245, 250, 634 A.2d 1330, 1332 (1994) ("Ec-

206 Baltimore Law Review [Vol. 27

provides: "[I]f a crane buckles and blocks the entrance to a build­ing resulting in its loss of use, the loss of use would be covered even though the building was not physically injured. "98

Commentators have also noted that the limited coverage pro­vided by the loss of use prong is circumscribed by the "loss of use" exclusion,99 one of four "business risk" exclusions. 1oo The loss of use exclusion provides that coverage does not apply to loss of use result­ing from the failure of the insured's product or work "to meet the level of performance, quality, fitness or durability warranted or rep­resented by the insured." 101 However, this exclusion does not pre­clude coverage for "loss of use of other tangible property resulting from the sudden and accidental physical injury to or destruction of the ... insured's products' or work."102 For example, the loss of use of an adjacent landowner's property that is not physically damaged

onomic loss includes ... lost profits resulting from the loss of use of the product."). But cf. Bauman, supra note 94, at 129 ("The loss of use must be at­tributable to an interference with the use of tangible property and not merely an economic loss caused by the insured's negligence.").

98. Tinker, supra note 11, at 232 (noting that this was the example given by the drafters of the 1966 CGL); accord Arness & Eliason, supra note 94, at 968; Goldsborough & Grube. supra note 85, at 17-18. Another way loss of use oc­curs is by the incorporation of the insured's defective product into a larger product. See Vasicheck, supra note 3, at 804, For example, the failure of an al­ternator sold by an insured and incorporated into an engine might not cause physical injury to the engine, but rather loss of use. See id. Note, however, that CGLs contain coverage exclusions for damage to the alternator itself. See id. at 804 n.7 (quoting exclusions "(I)" and "(m)" in the 1966 CGL and exclusions "(n)" and "(0)" in the 1973 CGL).

99. See Arness & Eliason, supra note 94, at 968 n.88. 100. See Woodfin Equities Corp. v. Harford Mut. Ins. Co., 110 Md. App. 616, 641,

678 A.2d 116, 128 (1996), rev'd on other grounds, 344 Md. 399, 687 A.2d 652 (1997). For an overview of all business risk exclusions, see Neeson & Meyer, supra note 1, at 75-115. See also Century I Joint Venture v. United States Fidel­ity & Guar. Co., 63 Md. App. 545, 553-57, 493 A.2d 370, 374-77 (1985) (provid­ing an excellent discussion and analysis of business risk exclusions; holding that condominiums constituted "products" sold by the insured); 2 ALLAN D. WINDT. INSURANCE CLAIMS & DISPUTES § 11.10, at 243-57 (3d ed. 1995 & Supp. 1997) (examining business risk exclusions under the heading "Insured's Work/Product Exclusion"); Leder, supra note 12, at C57 to ~O (providing Maryland law overview).

101. Tinker, supra note 11, at 278 (quoting 1973 CGL exclusion (m», quoted inAr­ness & Eliason, supra note 94, 968 at n.88; accord Goldsborough & Grube. supra note 85, at 43; Neeson & Meyer, supra note 1, at 78-79.

102. Tinker, supra note 11, at 278 (emphasis added) (quoting 1973 CGL exclusion (m»; accord Neeson & Meyer, supra note 1, at 79; see also Vasicheck, supra note 3, at 804 n.47.

1997] Sheets v. Brethren Mutual 207

may be covered even if the loss of use was caused by property dam­age to the insured's building, an excluded IOSS.103

In Pyles v. Pennsylvania Manufacturers" Ass'n Insurance CO.,I04 the Court of Special Appeals of Maryland addressed whether an under­lying complaint alleged property damage covered under a CGL.105 The insured in Pyles, a home builder, orally contracted with a pur­chaser to maintain $750,000 worth of builder's risk insurance on a home under construction. 106 The builder only purchased $250,000 of risk insurance, and a fire ensued that destroyed the home.107 Be­cause the damage exceeded the amount of builder's risk insurance actually obtained, the homeowner brought suit against the builder, alleging negligence and breach of contract based on the builder's failure to obtain the agreed upon amount of risk insurance. !Os

The builder contacted his CGL insurer and requested that it defend him in the underlying suit.109 The insurer refused, and the builder lost the underlying suit. llo The builder then brought a de-

103. See Tinker, supra note 11, at 234 (construing 1973 CGL provisions); see also United Capitol Ins. Co. v. Special Trucks, Inc., 918 F. Supp. 1250, 1260-61 (N.D. Ind. 1996) (citing cases that hold that loss of use and consequential damages-that are not part of the repair program-caused by the damage to the insured's work or product are covered); cf. Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 791-92 (NJ. 1979) ("[P]oorly-performed work will ... have to be replaced or repaired by the tradesman or a surety. On the other hand, should [the tradesman's product] fall from the wall, and thereby cause injury to the homeowner or his neighbor standing below or to a passing automobile, an occurrence of harm arises which is the proper subject of risk-sharing as provided in [the CGL]."); Reliance Ins. Co. v. Povia-Ballantine Corp., 738 F. Supp. 523, 526 (S.D. Ga. 1990) (providing an example of the distinction be­tween injury to the insured's product and liability to a third person: stucco falling from a wall and striking someone is covered, but replacing the stucco is not).

104. 90 Md. App. 320, 600 A.2d 1174 (1992). 105. The policy stated, "'Property damage' means ... physical injury to or de­

struction of tangible property which occurs during the policy period, includ­ing the loss of use thereof at any time resulting therefrom . . . ." [d. at 323, 600 A.2d at 1176.

106. See id. at 321, 600 A.2d at 1175. 107. See id. at 322, 600 A.2d at 1175. 108. See id. 109. See id. The Pyles court did not state whether the CGL insurer and the builder's

risk insurer were the same entity. Nonetheless, the policies are distinct-a builder's risk insurance policy provides coverage for a broader range of con­tingencies relating solely to a specific project. See 7A APPLEMAN, supra note 18, § 4492.03, at 44.

110. See Pyles, 90 Md. App. at 322, 600 A.2d at 1175.

208 Baltimore Law Review [Vol. 27

claratory judgment action against his eGL insurer, requesting that it be required to indemnify him for the costs incurred from both the judgment and defending the suit. II I Ruling in favor of the insurer, the circuit court held that the underlying claim lacked a sufficient nexus to property damage in order to establish a potentiality that the insurer would have a duty to indemnify.1I2

On appeal, the court of special appeals began its analysis of the insurer's duty to. defend by construing the phrase "because of prop­erty damage."113 The intermediate appellate court interpreted this phrase as requiring "a direct causal link or nexus between an in­sured's liability and property damage."114 However, in the underly­ing suit the court found the basis of the claim was breach of con­tract and negligence, not property damage. 1I5 Hence, the court ruled that the insurer had neither the duty to defend under the po­tentiality rule nor the duty to indemnify the insured for the judgment. 116

In Woodfin Equities Corp. v. Harford Mutual Insurance Co. , 117 the Court of Special Appeals of Maryland addressed the loss of use prong of the definition of "property damage" in an appeal from a declaratory judgment action coverage dispute. liS In the underlying

111. See id. at 323, 600 A.2d at 1176. Pursuant to a settlement agreement, the builder assigned his rights under the CGL to the homeowner. See id. at 322, 600 A.2d at 1175. Thus, the plaintiff in the declaratory judgment action against the insurer was also the plaintiff in the underlying suit. See id. at 322-23, 600 A.2d at 1175-76.

112. See id. at 323-24, 600 A.2d at 1176. 113. [d. at 325, 600 A.2d at 1177. 114. [d.

115. The court noted that property damage was a factual predicate to the builder's liability in the underlying suit. See id. The Pyles court concluded, however, that this factual predicate status did not make the potential liability "on account of property damage." [d.

116. See id. at 325-26, 600 A.2d at 1177. The court of special appeals cited other ju­risdictions in accordance with the rule it adopted, noting that Maryland law did not resolve the issue. See id. at 325, 600 A.2d at 1177 (citing, e.g., Reliance Ins. Co. v. Gary C. Wyatt, Inc., 540 So. 2d 688 (Ala. 1988».

117. 110 Md. App. 616, 678 A.2d 116 (1996) (Wilner, CJ., joining majority opin­ion), rev'd in part on other grounds, 344 Md. 399, 415, 687 A.2d 652, 659 (1997) (declining to address merits because the trial court did not issue a written de­claratory judgment). The court of special appeals decided Woodfin after Sheets, the subject case of this Note.

118. The policy language at issue came from the 1973 CGL. Compare Woodfin, 110 Md. App. at 639-40, 678 A.2d at 127 (quoting coverage provisions at issue), with Leder, supra note 12, at C-87 to C-88 (1973 CGL).

1997] Shetm v. Brethren Mutual 209

suit, developers and general contractors of a hotel obtained a de­fault judgment against an insured subcontractor that installed the hotel's heating, ventilation, and air conditioning (HVAC) system. 1l9

The underlying complaint, alleging negligence, breach of contract, and breach of warranty, sought damages caused by the failure of a large number of the HVAC units. '20 These damages included loss of the use of guest suites, cost of repairs and replacements, and man­agement time expended addressing the HVAC system failure. 12I

In the declaratory judgment action, the insurer asserted that the underlying claims did not involve property damage arising out of an occurrence, and, even if so, the business risk exclusions pre­cluded finding coverage. 122 Mter hearing testimony, the trial court held in favor of the insurer without specifying which contention as­serted by the insurer was dispositive. 123

The Court of Special Appeals of Maryland reversed in part and affirmed in part the trial court's ruling regarding coverage. The court held that the CGL did not cover the owner's expenses relat­ing to the removal, repair, or replacement of the faulty HVAC units. '24 The court found that because defective workmanship is not an occurrence, the policy did not cover damage to the HVAC units.125 Alternatively, the court held that even if an occurrence caused the damage, a business risk exclusion'26 precluded cover­age. 127 The exclusion provided that the CGL does not cover "prop­erty damage to the named insured's products arising out of such

119. See Woodfin, 110 Md. App. at 622, 678 A.2d at 118-19. 120. See id. at 623, 678 A.2d at 119. 121. See id. at 623-24, 678 A.2d at 119. 122. See id. at 628, 64042, 678 A.2d at 121, 127-28. See gmeraUy supra note 100 and

accompanying text (discussing business risk exclusions). 123. See Woodfin, 110 Md. App. at 629, 678 A.2d at 122 (noting only that the trial

court held in favor of the insurer). Notably, the Court of Appeals of Maryland reversed the court of special appeals solely because the court of special ap­peals reached the merits of the case without the benefit of a written declara­tion from the circuit court. See Harford Mut. Ins. Co. v. Woodfin Equities Corp., 344 Md. 399, 415, 687 A.2d 652, 659 (1997).

124. See Woodfin, 110 Md. App. at 651, 678 A.2d at 133. 125. See id. at 648, 678 A.2d at 131 ("Courts uniformly hold that when property

damage arising out of the insured's defective workmanship is confined to the insured's own work product, the damage is not caused by an 'occurrence' within the meaning of the CGL policy." (citing, e.g., Reliance Ins. Co. v. Mogavero, 640 F. Supp. 84 (D. Md. 1986».

126. See generaUy supra note 100 and accompanying text (discussing business risk ex­clusions).

127. See Woodfin, 110 Md. App. at 649-50, 678 A.2d at 132.

210 Baltimore Law Review [Vol. 27

products or any part of such products."I28 Conversely, regarding loss of use of the guest suites, the court

of special appeals held that the policy covered such damage because the breaking down of the HVAC units, though property damage ex­cluded under the policy, constituted an occurrence. 129 Thus, the loss of use of the guest suites constituted property damage caused by an occurrence under the CGL. 130 The court noted that the loss of use exclusion 131 explicitly did not apply to the loss of use of property caused by the failure of the insured's property or work. \32

2. "Occurrence"

Since 1966, CGLs have defined "occurrence" as an "acci­dent. " 133 CGLs also provide that damages are not covered if they are either expected or intended from the standpoint of the insured. l34

128. Id. at 650, 678 A.2d at 132. Because the definition of "insured's product" in­cluded property sold by the insured, the court rejected the insurer's argument that the CGL excluded damage to the HVAC units because ownership was transferred. See id. at 650-51, 678 A.2d at 132. In any event, the court added, the result would be the same because of the "completed operations hazard" exclusion. See id. at 651 n.9, 678 A.2d at 133 n.9.

129. See id. at 652, 678 A.2d at 133 ("To the extent that the insured's defective workmanship causes damage to [property other than the product or com­pleted work of the insured], courts uniformly hold that such damage is caused by an 'occurrence,' and is, therefore, compensable under the CGL pol­icy.").

130. See id. at 652, 678 A.2d at 133. 131. See supra notes 99-103 and accompanying text for a discussion of the loss of

use exclusion. 132. See Woodfin, 110 Md. App. at 653, 678 A.2d at 133-34. Likewise, the court noted

that the other business risk exclusions--theinsured's property and completed operations hazard exclusions--were inapplicable. See id. at 653, 678 A.2d at 134. See generaUy supra note 100 and accompanying text (discussing business risk exclusions).

133. See Tinker, supra note 11, at 256, see also Leder, supra note 12, at C-93 (1973 CGL); id. at C-I04 (1985 CGL); id. at C-116 (1996 CGL). The 1973 CGL pro-

\ vides:" 'Occurrence' means an accident, including continuous or repeated ex­posure to conditions, which results in bodily injury or property damage neither expected or intended from the standpoint of the insured." Leder, supra note 12, at C-93. The 1985 and 1996 CGLs both provide: " • Occurrence , means an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Id. at C-104 (1985 CGL); id. at C-116 (1996 CGL).

134. The 1973 CGL accomplished this by adding this provision into the definition of "occurrence." See supra note 133. The 1985 and 1996 CGLs accomplish this through an exclusion that provides that the policy does not cover " 'property damage' expected or intended from the standpoint of the insured." Leder,

1997] Sheets v. Brethren Mutual 211

Moreover, insurers sometimes modify CGLs to provide for a more explicit definition of "occurrence."135

In Haynes v. American Casualty CO.,136 the Court of Appeals of Maryiand addressed the definition of "accident." In Haynes, an in­sured contractor instructed his employee to excavate land up to an adjacent landowner's property.137 The employee excavated beyond the property line, and the adjacent landowner sued.138 The contrac­tor's insurer began to provide a defense, but during the course of the litigation the insurer denied liability under the policy and re­fused to pay for the ensuing legal bills and judgment. 139 Thereafter, the contractor filed suit against the insurer. 14o In the circuit court, the insurer asserted that the damage to the adjoining landowner was not an accident because the employee clearly intended to exca­vate the adjoining land and the policy language did not include mistakes. 141 The trial judge found in favor of the insurer, and the insured appealed to the court of appeals. 142

On appeal, the court of appeals addressed the distinction be­tween "accidental means" and "accidental result."143 The court reit­erated Justice Cardozo's warning that adopting such a distinction would "plunge this branch of the law into a Serbonian Bog."I44 The

supra note 12, at C-96 (1985 CGL (exclusion "a."»; id. at C-106 (1996 CGL (exclusion "a."». See generally Government Employees Ins. Co. v. Ropka, 74 Md. App. 249, 257, 536 A.2d 1214, 1218 (1988) ("It is generally true that an insurer has no duty to defend a cause of action against an insured if that cause of action asserts liability on the part of the insured that comes within an exclusion in the insurance policy.").

135. See, e.g., John Hancock Mut. Life Ins. Co. v. Plummer, 181 Md. 140, 142, 28 A.2d 856, 857 (1942) (construing a policy providing coverage for bodily injury "caused solely by external, violent and accidental means").

136. 228 Md. 394, 179 A.2d 900 (1962). 137. See id. at 395, 179 A.2d at 901. 138. See id. 139. See id. at 395-96, 179 A.2d at 901. 140. See id. at 396, 179 A.2d at 901-02. 141. See id. at 396, 179 A.2d at 902. 142. See id. 143. The court of appeals stated that it did not intend to make a universal ruling

as to whether or not a distinction between accidental means and results should be made. See id. at 399-400, 179 A.2d at 904.

144. [d. at 399 n.1, 179 A.2d at 904 n.1 (quoting Landress v. Phoenix Mut. Life Ins. Co., 291 U.S. 491, 499 (1934) (Cardozo, j., dissenting». The Serbonian Bog reference comes from JOHN MILTON. PARADISE LOST, bk. 2, I. 592 (1667): "A gulf profound as the Serbonian Bog Betwixt Damiata and mount Casius old, where Armies whole have sunk .... " [d., quoted in Haynes, 228 Md. at 399 n.1,

212 Baltimore Law Review [Vol. 27

court avoided this distinction, holding that unless the policy ex­pressly requires either an accidental means or result, courts should interpret the term "accident" as encompassing either accidental means or results. 145 To hold otherwise, the court reasoned, would put too narrow an interpretation on the contract and limit recovery to those situations where both the result and the means were acci­dental. l46 Moreover, in addressing the insurer's contention that the policy did not include coverage for intentional acts, the court clari­fied that an accident may result from an intentional act if some­thing unusual, unexpected, and unforeseen occurs.147 Thus, "an act attributable solely to negligence may be an accident."148 Applied to the facts in Haynes, the court found that even though the employee intentionally excavated the land, the policy afforded coverage be­cause the result was accidental- the employee did not intentionally excavate the wrong land. 149

In Harleysville Mutual Casualty Co. v. Harris & Brooks, Inc.,150 the Court of Appeals of Maryland again addressed the scope of the term "accident." In the underlying suit, adjacent homeowners brought an action to recover for smoke damage to their homes

179 A.2d at 904 n.!. In his dissent in Landress, Justice Cardozo posited that, in the strictest

sense, there is no such thing as an accident. See Landress, 291 U.S. at 499 (Car­dozo, J., dissenting). He opined that the distinction between accidental means and result would not survive the application of the principle that ambiguities in insurance contracts are construed against the insurance company as drafter of the document. See id. Hence, he concluded, because the average person be­lieves that there is such a thing as an accident, the distinction between result and means is untenable. See id.

145. See Haynes, 228 Md. at 400-01, 179 A.2d at 904. The court of appeals noted that it previously addressed this distinction twice before when it construed pol­icies that covered "bodily injury 'caused solely by external, violent and acciden­tal means.' " [d. at 400, 179 A.2d at 904 (citing John Hancock Mut. Life Ins. Co. v. Plummer, 181 Md. 140, 28 A.2d 856 (1942), and Home Beneficial Life Ins. Co. v. Partain, 205 Md. 60, 106 A.2d 79 (1954». The court noted that those policies expressly required the court to limit coverage to accidental means. See Haynes, 228 Md. at 400, 179 A.2d at 904.

146. See Haynes, 228 Md. at 400, 179 A.2d at 904. 147. See id. at 397,179 A.2d at 902 (discussing Justice Rive's "well reasoned dissent"

in M.R. Thomason, United States Fidelity & Guar. Co. v. United States, 248 F.2d 417, 420-21 (5th Cir. 1957) (Rives, J., dissenting».

148. Haynes, 228 Md. at 398, 179 A.2d at 903 (quoting Minkov v. Reliance Ins. Co. of Philadelphia, 149 A.2d 260, 263 (NJ. Super. Ct. App. Div. 1959».

149. See id. at 399, 179 A.2d at 903. 150. 248 Md. 148, 235 A.2d 556 (1967).

1997] Sheets v. Brethren Mutual 213

caused from the insured contractor burning piles of trees for thirty­six hours. lSI The contractor's insurer appealed a declaratory judg­ment in favor of the insured, and the court of appeals considered whether damage to the adjacent homes was caused by an accident. 152

In addressing the scope of the policy's phrase "caused by an ac­cident," the court of appeals sought to attribute to the term "acci­dent" its customary and ordinary meaning. 153 The court referred to two dictionaries and determined that an accident is an event that takes place without one's foresight or expectation. 154 The court reaf­firmed its previous definition in Haynes, that an accident can in­clude an intentional act if the result is something unforeseen, unu­sual, and unexpected. 155 The court added, however, that an accident must take place "without one's foresight or expectation."156 Because the contractor had not taken precautionary measures when burning the trees, the court found the resulting damage should have been expected because it could not have been caused without the con­tractor's foresight or expectation. 157

In State Farm Mutual Auto Insurance Co. v. Treas,158 the court of appeals addressed whether an insurer had a duty to indemnify its insured for a judgment based on striking a pedestrian with a car. 159 The insured had already pleaded guilty to common law manslaugh­ter and had received a six-year prison sentence.160 The court reaf­firmed that an intentional act may be considered an accident "if in that act, something unforeseen, unusual and unexpected occurs

151. See id. at 150, 235 A.2d at 557. 152. See id. at 151, 235 A.2d at 557. The insured subcontractor received judgment

in his favor in the circuit court. See id. 153. See id. 154. See id. The court quoted the SHORTER OXFORD ENGUSH DICTIONARY (2d ed.

1939), which defined "accident" as "anything that happens; an event; espe­cially an unforeseen contingency," and WEBSTER'S TwENTIETH CENTURY DIC­

TIONARY (1950), which defined "accident" as "a happening; an event that takes place without one's foresight or expectation; an event that proceeds from an unknown cause, or is an unusual effect of a known cause, and therefore not expected." Harleysville, 248 Md. at 151, 235 A.2d at 557.

155. See Harleysville, 248 Md. at 151-52, 235 A.2d at 558. 156. [d. at 154, 235 A.2d at 559. 157. See id. 158. 254 Md. 615, 255 A.2d 296 (1969). 159. In the declaratory judgment act against the insurer, the circuit court judge

found that the death of the victim was caused by an accident. See id. at 617, 255 A.2d at 297.

160. See id. at 618, 255 A.2d at 298.

214 Baltimore Law Review [Vol. 27

which produces the result." 161 Comparing the facts with those in Harleysville, the court reasoned that if the failure to take precautions to prevent property damage was not an accident, the court "cannot say that ... accelerating and braking to induce [the victim] to move [from in front of the car], and finally striking her when she refused to do so," is an accident. 162

In Ed. Winkler & Son, Inc. v. Ohio Casualty Insurance CO.,163 the Court of Special Appeals of Maryland addressed whether an insurer had an obligation to defend its insured, a jewelry store owner, in a suit for false arrest, slander, and malicious prosecution arising from false accusations of shoplifting. l64 Construing the term "accident," the court looked first to the dictionary to determine the word's cus­tomary and ordinary meaning. 165 The court of special appeals re­cited the definition adopted in Harleysville, adding that the key con­sideration is the "unexpected nature of the event or its aftermath." 166 Applying this formulation, the court concluded that the insured's actions were deliberate and that the effect was well within the insured's foresight and expectatibn.167 Hence, the court held the insurer had no duty to defend. 168

In IA Construction Corp. v. T & T Surveying, Inc.,169 the United States District Court for the District of Maryland addressed whether an insured subcontractor's surveying error was an accident covered

161. Id. at 619, 255 A.2d at 298 (quoting Harleysville, 248 Md. at 151-52, 235 A.2d at 558).

162. Id. at 620, 255 A.2d at 299. 163. 51 Md. App. 190, 441 A.2d 1129 (1982), overruled Uy Sheets v. Brethren Mut.

Ins. Co., 342 Md. 634, 654, 679 A.2d 540, 550 (1996). 164. See Ed. Winkler, 57 Md. App. at 191,441 A.2d at 1130. 165. See id. at 194, 441 A.2d at 1132 (discussing Harleysville, 248 Md. at 151, 235

A.2d at 558, regarding the proposition that courts should look to a dictionary as a starting point for detennining customary and nonnal meaning).

166. Id. at 194, 441 A.2d at 1132. The court quoted 7A APPLEMAN, supra note 18, § 4492, at 17: " 'As used in insurance policies{, "accident"] is simply an undesigned, sudden, and unexpected event, usually of an affiictive or unfortunate character, and often accompanied by a manifestation of force, but it does not mean the natural and ordinary consequences of a negligent act.' " Ed. Winkler, 51 Md. App. at 195, 441 A.2d at 1132.

167. See Ed. Winkler, 51 Md. App. at 195, 441 A.2d at 1132. 168. The court held that because it was "clear" that the actions taken by the in­

sured were not an accident, there was no potentiality that the claim was cov­ered under the policy; therefore, the insurer had no duty to defend. See id. at 196, 441 A.2d at 1133.

169. 822 F. Supp. 1213 (D. Md. 1993) (mem.), cited with disapproval in Sheets v. Brethren Mutual Ins. Co., 342 Md. 634, 654 n.4, 679 A.2d 540, 550 n.4 (1996).

1997] Sheets v. Brethren Mutual 215

under its CGL.170 In the underlying suit, a general contractor had been commissioned to build a passenger train platform at Camden Yards Station in Baltimore. 171 The general contractor sued the in­sured subcontractor, asserting claims of negligence, professional malpractice, and breach of contract based on the subcontractor's al­leged use of erroneous data in laying the platform's foundation.172 In a declaratory judgment action to determine coverage under the subcontractor's CGL, the district court held that the subcontractor's insurer was not obligated to indemnify.173 The district court explic­itly followed the definition in Ed. Winkler, that an " 'accident' means an 'undesigned, sudden and unexpected event, usually of an afflic­tive or unfortunate character, and often accompanied by a manifes­tation of force, but it does not mean the natural and ordinary conse­quences of a negligent act.' "174 In denying the insurer's obligation to indemnify, the judge opined: "[T] his is the stuff of the construction trade (and of professional malpractice insurance), not a risk pro­tected against by a general liability policy." 175

D. The Tort of Negligent Misrepresentation Under Maryland Law

The tort of negligent misrepresentation was not recognized at early common law. 176 A plaintiff injured by false representations could bring an action only for fraud. 177 This limitation caused many hardships because an action for fraud requires a plaintiff to prove that the defendant made a false statement with scienter, an intent to defraud. 178 An honest belief, no matter how unreasonable, does not

170. See IA Constr. Corp., 822 F. Supp. at 1214. 171. See id. 172. See id. The general contractor had to demolish portions of its completed work

because the platform was at the wrong level. See id. Because the court found no accident, it never reached the issue of whether the damages prayed for constituted property damage within the terms of the policy. See id. at 1215 n.2. But see Leder, supra note 12, at C-9 (stating that the court in IA Constr. Corp. did find property damage).

173. See IA Constr. Corp., 822 F. Supp. at 1215. 174. [d. (quoting Ed. Winkler, 51 Md. App. at 195,441 A.2d at 1132). 175. [d. at 1215. 176. See Martens Chevrolet, Inc. v. Seney, 292 Md. 328, 333, 439 A.2d 534, 537

(1982); see also RICHARD J. GILBERT & PAUL T. GILBERT, MARYlAND TORT LAw HANDBOOK § 17.4, at 197 (2d ed. 1992).

177.' See Martens Chevrolet, 292 Md. at 333, 439 A.2d at 537. 178. See, e.g., Suburban Properties Management, Inc. v. Johnson, 236 Md. 455, 460,

204 A.2d 326, 329 (1964); see also Martens Chevrolet, 292 Md. at 334,439 A.2d at 537-38 (recognizing that the tort of negligent misrepresentation stemmed from the recognition of the hardships resulting from the strictures of an ac-

216 Baltimore Law Review [Vol. 27

satisfy the requirement of scienter if the speaker has information to justify it.179

In Virginia Dare Stores v. Schuman,180 the court of appeals first recognized the tort of negligent misrepresentation in Maryland. 181 The plaintiff, a cleaning laborer, and the defendant, a store owner, stood as employer-employee at the time of the misrepresentation. 182

An agent of the store owner told the laborer that a dress display case was sturdy enough to stand on while cleaning out-of-reach por­tions of the ShOp.183 Relying on the agent's statement, the laborer stepped onto the case and it collapsed, injuring the laborer. 184 Rec­ognizing recovery for negligent statements, the court outlined the elements of negligent representation:

[Negligent misrepresentation] is not necessarily confined to injuries arising from contractual relations; that the action lies for negligent words, recovery being permitted where one relies on the statements of another, negligently volun­teering an erroneous opinion, intending that it be acted upon, and knowing that loss or injury are likely to follow if it is acted upon. 185

Since Virginia Dare Stores, the elements for misrepresentation have remained constant. 186 To state a cause of action for negligent

tion for deceit); GILBERT & GILBERT, supra note 176, § 17.1.4, at 193; W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAw OF TORTS § 107, at 741 (5th ed. 1984).

179. See Donnelly v. Baltimore Trust & Guar. Co., 102 Md. 1,30,61 A. 301, 312-13 (1905) (quoting Derry v. Peek, 14 App. Cas. 337 (H.L. 1889».

180. 175 Md. 287, 1 A.2d 897 (1938). 181. See id. at 291-92, 1 A.2d at 899. 182. See id. at 287, 1 A.2d at 898-99. The plaintiff was actually employed by a com­

pany contracting with the defendant store owner. Nonetheless, the court con­cluded that the defendant owed some duty, either as an employee of the store's contractor or as an individual doing work both on the defendant's premises and under the defendant's direction. See id. at 291, 1 A.2d at 898-99 (by implication).

183. See id. at 290, 1 A.2d at 900. 184. See id. 185. [d. at 291-92, 1 A.2d at 899. The Virginia Dares Stores court primarily relied on

two cases from other jurisdictions. See id. (citing International Prod. Co. v. Erie RR Co., 155 N.E. 662 (N.Y 1927), and Cunningham v. C.R Pease House Furnishing Co., 69 A. 120 (N.H. 1908».

186. See, e.g., Gross v. Sussex, Inc., 332 Md. 247, 259, 630 A.2d 1156, 1162 (1993); Weisman v. Connors, 312 Md. 428, 444, 540 A.2d 783, 791 (1988); Holt v. Kolker, 189 Md. 636, 639, 57 A.2d 287,288 (1948); Virginia Dare Stores, 175 Md.

1997] Sheets v. Brethren Mutual 217

misrepresentation under Maryland law, a plaintiff must establish the following five elements: (I) the defendant owes a duty of care to the plaintiff; .(2) the defendant negligently asserts a false statement of material fact; (3) the defendant intends that the statement be re­lied upon by the plaintiff; (4) the defendant knows that th& plaintiff intends to rely upon the statement; and (5) the plaintiff relies upon the statement, sustaining damage as a direct result of the misstatement. 187

1. Arm's Length Transactions

Mter some confusion as to the viability of the tort of negligent misrepresentation,188 the court of appeals extended the tort to arm's length transactions in Martens Chevrolet, Inc. v. Seney.189 The plaintiff, a purchaser of an automobile dealership, brought suit against the seller for, inter alia, alleged negligent misrepresentations concerning the financial conditions of the company.190 The issues before the court were whether the tort of negligent misrepresentation was still viable and, if so, whether arm's length transactions qualified as proper subjects of the tort. 191 The court held affirmatively on both issues. 192 Additionally, the court held that an integration clause in a

at 291-92, 1 A.2d at 899. 187. See, e.g., Weisman, 312 Md. at 444, 540 A.2d at 791. 188. Mter Virginia Dare StQT(!S, the court of appeals limited the tort of negligent mis­

representation to personal injuries. See Holt, 189 Md. at 639, 57 A.2d at 288. In Holt, a plumber told the plaintiff that a porch was safe to walk on. Relying on the plumber's statement, the plaintiff stepped on the porch and fell through. See id. at 638-39, 57 A.2d at 288. The court held that there was no liability be­cause the plumber owed no duty to make accurate representations. See id. In dicta, the court of appeals limited the tort to personal injuries only. See id. at 639, 57 A.2d at 288.

In Brack v. Evans, 230 Md. 548, 187 A.2d 880 (1963), the court of appeals addressed whether economic losses could be recovered in an action for negli­gent misrepresentation. In Brack, the plaintiff sought damages for negligent misrepresentations by a stockbroker. See id. at 552-53, 187 A.2d at 882. The court held that economic losses could be recovered for negligent misrepresen­tation. See id. at 554, 187 A.2d at 883 (implied holding).

In a later case, the court implied that the tort was no longer viable. See Delmarva Drilling Co. v. Tuckahoe Shopping Ctr., Inc., 268 Md. 417, 427, 302 A.2d 37, 4142 (1973).

189. 292 Md. 328, 338 n.7, 439 A.2d 534, 53940 n.7 (1982). 190. See id. at 330, 439 A.2d at 536. For an in-depth discussion of Martens Chevrolet,

see Susan F. Martielli, Note, Martens Chevrolet v. Seney-Extending the Tort of Negligent Misrepresentation, 42 MD. L. REv. 596 (1983).

191. See Martens Chevrolet, 292 Md. at 338 n.7, 439 A.2d at 53940 n.7. 192. See id.

218 Baltimore Law Review [Vol. 27

contract does not shield parties from tort liability for misrepresenta­tions. 193 If the rule were otherwise, the court reasoned, the effect would be to permit parties to circumvent the implied covenant of good faith in every contract. 194

n 2. Limited to Statements of Fact

In Weisman v. Connors,195 the court of appeals addressed whether an employee could maintain a cause of action against his employer for negligent misrepresentation of future intentions and current facts at the time of entering into an employment con­tract. l96 The plaintiff succeeded at trial in obtaining a jury verdict in excess of two million dollars based on evidence that his employer lied at the time of contracting. 197 In reviewing the record, the court of appeals found no evidence that the employer negligently misrep­resented his intentions and that the evidence established that the employer was merely clarifying the actual duties entailed in this newly created position. 19B However, the court reasoned that the ver­dict might have rested solely on negligent misrepresentations con­cerning the current state of affairs at the place of employment, a proper basis for liability because the statements did not involve the .employer's intentions or expectations. 199 Moreover, the court stated that in "making representations, 'the negligence may occur in ei­ther obtaining or in communicating the information' " relating to past or present facts. 2OO Thus, because the jury's verdict regarding negligent representation could have been based on either state-

193. See id. The integration clause in Martens Chevrolet provided: "[This contract] supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, expressed or implied, oral or written .... " [d.

194. See id. 195. 312 Md. 428, 540 A.2d 783 (1988). 196. See id. at 441, 540 A.2d at 789. The Weisman opinion contains an in-depth dis­

cussion of the historical development of the tort of negligent misrepresenta­tion in Maryland. See id. at 44348, 540 A.2d at 790-93.

197. The court of special appeals affirmed. See Weisman v. Connors, 69 Md. App. 732, 736-37, 519 A.2d 795, 797 (1987).

198. See Weisman, 312 Md. at 454, 540 A.2d at 796. 199. See id. at 457-58, 540 A.2d at 797-98. 200. [d. at 456, 540 A.2d at 796 (citation omitted). The court also highlighted that

four of the representations were in a written contract, raising the issue of whether statements in a contract can serve as a basis for a negligent misrepre­sentation claim. See id. at 456 n.4, 540 A.2d at 797 n.4. Reserving judgment, the court noted "that the availability of both tort and contract actions for the same kind of harm has engendered considerable confusion and complexity." [d. (citing KEETON ET AL., supra note 178, § 92, at 655).

1997] Sheets v. Brethren Mutual 219

ments concerning facts or intentions, the court remanded for con­sideration of only the factual representations.20t

3. Measure of Damages

In an extensive footnote, the Weisman court noted that dam­ages in negligent misrepresentation claims should be measured under the flexibility rule set forth in Hinkle v. Rnckville Motor CO.202 In Hinkle, the Court of Appeals of Maryland addressed the proper method for calculation of damages in suits alleging fraud. 203 The Hinkle court noted that it previously accepted both the "benefit-of­the-bargain" and "out-of-pocket" calculations, never adopting either approach to the exclusion of the other.204 Because fraud is founded on a breach of contract, the Hinkle court reasoned, either approach is appropriate.20S Hence, the court adopted four guidelines compris­ing the flexibility rule in measuring damages for fraud:

"(1) If the defrauded party is content with the recovery of only the amount he actually lost, his damages will be mea­sured under that rule; (2) if the fraudulent representation also amounted to a war­ranty, recovery may be had for loss of the bargain because a fraud accompanied by a broken promise should cost the wrongdoer as much as the latter alone; (3) where the circumstances disclosed by the proof are so vague as to cast virtually no light upon the value of the property had it conformed to the representations, the court will award damages equal only to the loss sustained; and (4) where ... the damages under the benefit of the bar­gain rule are proved with sufficient certainty, that rule will be employed. "206

201. See id. at 460, 540 A.2d at 799. 202. 262 Md. 502, 278 A.2d 42 (1971), cited in Weisman, 312 Md. at 459-60 n.6, 540

A.2d at 798 n.6. 203. See Hinkle, 262 Md. at 504, 278 A.2d at 43. 204. See id. at 510, 278 A.2d at 4647. 205. See id. at 510, 278 A.2d at 47 (quoting Webster v. Woolford, 81 Md. 329, 330,

32 A. 319, 320 (1895) ("The action, it is true, is in the nature of an action for tort (deceit), but it is a tort founded on a breach of contract (in regard to the sale of property), and, there being no question as to exemplary damages, the rule as to the measure of damages is the same as in case for breach of con­tract in regard to the sale of property. ") ) .

220 Baltimore Law Review [Vol. 27

4. Reasonableness of Reliance

In Village of Cross Keys, Inc. v. United States Gypsum CO.,207 the court of appeals addressed the requisite reasonableness of a plain­tiff's reliance in a negligent misrepresentation claim.20s The plain­tiffs, an architect and a developer, sued United States Gypsum, Inc. for, inter alia, negligent misrepresentation based on allegedly defec­tive specifications contained in a brochure promoting the defend­ant's brick veneer.209 The court held that the plaintiffs' reliance on the plans in the brochure was not reasonable because the plaintiffs did not even use the defendant's products as specified in the bro­chure.2lO The court noted that the tort of negligent misrepresenta­tion is more restrictive than fraud; moreover, the court concluded that liability for negligent misrepresentation is more narrow when complaining of only pecuniary 10ss.211

E. The Duty to Defend Negligent Misrepresentation Claims

Whether CGL insurers have a duty to defend against negligent misrepresentation claims raises three issues. First, does a negligent misrepresentation constitute an occurrence?212 Second, does a negli­gent misrepresentation result in property damage?i13 Third, notwith­standing the first two issues, does any exclusion preclude coverage?214

Only a relatively small number of jurisdictions have directly confronted these issues. For ease in organization, this Note divides those jurisdictions into two categories: (1) jurisdictions that hold CGLs do not cover liability for negligent misrepresentations (major-

206. [d. at 511-12, 278 A.2d at 47 (alteration in original) (quoting Selman v. Shir-ley, 85 P.2d 384, 394 (Or. 1938».

207. 315 Md. 741, 556 A.2d 1126 (1989). 208. See id. at 759-60, 556 A.2d at 1134-35. 209. See id. at 744, 556 A.2d at 1127. 210. See id. at 760, 556 A.2d at 1135. 211. See id. at 756-57, 556 A.2d at 1133 (citing RESTATEMENT (SECOND) OF TORTS

§§ 311, 552 (1965». 212. For an in-depth discussion of judicial construction of the term "occurrence,"

see supra notes 133-75 and accompanying text. 213. For an in-depth discussion of judicial construction of the term "property dam­

age," see supra notes 87-132 and accompanying text. 214. See generally Gov't Employees Ins. Co. v. Ropka, 74 Md. App. 249, 257, 536 A.2d

1214, 1218 (1988) (noting that an insurer has no duty to defend if liability comes within an exclusion in the policy).

1997] Sheets v. Brethren Mutual 221

ity); and (2) those that hold CGLs do cover liability for negligent misrepresentations (minority).

1. Majority Rule: Liability for Negligent Misrepresentations IS not Covered Under CGLs

In Safeco Insurance Co. of America v. Andrews,215 the United States Court of Appeals for the Ninth Circuit decided the seminal case re­garding CGUl6 insurers' duty to defend against negligent misrepre­sentation claims. In Safeco, an insured seller of a home brought an action against its insurer seeking a declaration that the insurer had a duty to defend in an underlying suit.2I7 In the underlying suit, the purchaser of the home sued the insured seller for, inter alia, negli­gent misrepresentation based on the seller's failure to inspect the home and inform the purchaser of material facts affecting its value, including defective drainage from the main sewer line.2lB Thus, the Safeco court addressed whether negligent misrepresentation may constitute an accident and, if so, whether the damages sought were property damage.219

The Safeco court held that the relief sought did not constitute property damage.22o The court reasoned that the purchaser was seeking damages for economic loss-the difference between the ac­tual value of the property and its value as represented-not damage to tangible property.221 Moreover, the court reasoned, even if the re­lief sought was property damage under the policy, the alleged mis­representations were not "an 'occurrence' or a 'peril insured against' under the terms of the policy. "222 Therefore, there being no

215. 915 F.2d 500 (9th Cir. 1990) (applying California law). 216. The policy at issue in Safeeo was a homeowner's policy. See id. at 50l. Neverthe­

less, the language at issue was substantially the same as in the CGLs. See gener­aUy Tinker, supra note 11, at 218 (noting that because CGL language is found in other liability forms, principles and precedents overlap between CGLs and other forms of liability policies).

217. See Safeeo, 915 F.2d at 50l. 218. See id. The purchaser claimed that the seller failed to disclose that the land

was susceptible to landslides, the electrical wiring and plumbing was defective, and the basement leaked. See id.

219. See id. at 501-02. 220. See id. at 502. 22l. See id. (" [The] claims do not expose [the insured] to liability for any damage

to tangible property, but rather for economic loss resulting from [the in­sured's] alleged failure to discover and disclose facts relevant to the property's value and desirability.").

222. Id.

222 Baltimore Law Review [Vol. 27

potentiality that the insurer would be liable for a judgment against the insured, the court held that the insurer had no duty to defend.223

The majority of jurisdictions that have addressed the issue have followed the Sajeco decision.224 To date, jurisdictions holding eGLs

223. See id. 224. See State Fann Fire & Cas. Co. v. Brewer, 914 F. Supp. 140, 14243 (S.D. Miss.

1996) (applying Mississippi law; finding negligent misrepresentation did not result in property damage); Safeco Ins. Co. of Am. v. Tozier, No. CIV.A.93-2453-GTV, 1994 WL 476304, at *3 (D. Kan. Aug. 16, 1994) (applying Kansas law; finding negligent misrepresentation did not result in property damage); M.L. Foss, Inc. v. Liberty Mut. Ins. Co., 885 P.2d 284, 285-86 (Col. Ct. App. 1994) (maintaining that negligent misrepresentation is not an occurrence and, nevertheless, did not result in property damage); SCA Disposal Services of New England, Inc. v. Central Nat'l Ins. Co. of Omaha, No. 900393, 1994 WL 879689, at *4 (Mass. Super. Apr. 12, 1994) (finding losses caused by negligent misrepresentation were not property damage); Martin v. State Fann Fire & Cas. Co., 932 P.2d 1207, 1213 (Or. Ct. App. 1997) ("[The misrepresentation] claim is not based on physical damage to the property but on the liability that the plaintiffs incurred when they purchased it."); State Fann Lloyds v. Kessler, 932 S.W.2d 732, 738-39 (Tex. Ct. App. 1996) (finding negligent misrepresenta­tion is not an occurrence and damage therefrom is economic loss, not prop­erty damage); Qualman v. Bruckmoser, 471 N.W.2d 282, 285 (Wis. Ct. App. 1991) (finding negligent misrepresentation did not result in property damage, including loss of use); see also United States Fidelity & Guar. Co. v. Warwick Dev. Co., 446 So. 2d 1021, 1023 (Ala. 1984) (holding misrepresentations are not an occurrence and do not result in property damage), quoted in State Fann Fire & Cas. Co. v. Gwin, 658 So. 2d 426, 428 (Ala. 1995); Aetna Cas. & Sur. Co. v. Cotter, 522 N.E.2d 1013, 1015 (Mass. Ct. App.1988) (finding mis­representation did not produce bodily injury or property damage); Tschimperle v. Aetna Cas. & Sur. Co., 529 N.W.2d 421, 424-25 (Minn. Ct. App. 1995) (holding negligent misrepresentation cannot be an accident and result­ing loss of investment does not constitute property damage); Fisher v. Fitch­burg Mut. Ins. Co., 560 A.2d 630, 632-33 (N.H. 1989) (finding negligent mis­representation not an occurrence and resulting loss did not constitute property damage); First Wyo. Bank, N.A., Jackson Hole v. Continental Ins. Co., 860 P.2d 1094, 1101 (Wyo. 1993) (finding negligent misrepresentation not an occurrence and declining to address "property damage" issue). But see First Newton Nat'l Bank v. General Cas. Co. of Wis., 426 N.W.2d 618, 624-26 (Iowa 1988) (finding negligent misrepresentation constitutes an occurrence); Colomb v. United States Fidelity & Guar. Co., 539 So. 2d 940, 942 (La. Ct. App. 1989) (implied holding) (distinguishing between breach of contract and negligent misrepresentation, and implying the latter constitutes an occur­rence); Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 645, 657, 679 A.2d 540, 545, 551 (1996) (holding negligent misrepresentation constitutes an occur­rence if resulting damage is neither expected nor foreseen and, under the facts, damage was property damage in the fonn of loss of use); Commercial

1997] Sheets v. Brethren Mutual 223

do not cover liability from negligent misrepresentations, either be­cause of lack of an occurrence or property damage, include Ala­bama, California, Colorado, Massachusetts, Minnesota, New Hamp­shire, Oregon, Texas, Wisconsin, and Wyoming.225

Courts in the majority have offered further clarification and ra­tionale for the Safeco holdings. Regarding the "property damage" holding, some courts explained the lack of property damage from misrepresentations in terms of a lack of a causal nexus.226 For exam-

Union Ins. Co. v. Royal Ins. Co., 658 A.2d 1081, 1082-83 (Me. 1995) (implied holding) (assuming that negligent misrepresentation claim would be poten­tially covered if it happened when policy was active, thereby implying negli­gent misrepresentation constitutes an occurrence); Aetna Cas. & Sur. Co. v. Metropolitan Baptist Church, 967 F. Supp. 217, 223 (S.D. Tex. 1996) (applying Texas law; holding negligent misrepresentation constitutes an accident); State Farm Fire & Cas. Co. v. Helminiak, 659 N.E.2d 385, 389 (Ohio Ct. C.P. 1995) (holding negligent misrepresentation constitutes an accident); see also SL In­dus., Inc. v. American Motorists Ins. Co., 607 A.2d 1266, 1276-77 (NJ. 1992) (holding common law fraud may constitute an occurrence so long as the in­sured did not subjectively intend to inflict the harm alleged).

Note that the federal district court in Metropolitan Baptist Church and the Court of Appeals of Texas are in direct conflict over the status of Texas law on this issue. Compare Metropolitan Baptist Church, 967 F. Supp. at 223-24 (noting on December 16, 1996 that the issue has not been addressed by the Texas courts, and holding negligent misrepresentation constitutes an occurrence), with Kessler, 932 S.W.2d at 738-39 (holding on October 31, 1996 that negligent misrepresentation is not an occurrence and that damage therefrom is eco­nomic loss, not property damage).

225. See cases cited supra note 224 (providing precedent from Alabama, Colorado, Kansas (federal district court opinion), Massachusetts, Minnesota, Mississippi (federal district court opinion), New Hampshire, Oregon, Texas, Wisconsin, and Wyoming); Safeco, 915 F.2d at 502 (California).

226. See, e.g., Martin, 932 P.2d at 1213 ("There is thus no causal connection be­tween the misrepresentations and the physical damage; the only causal con­nection is with damage to the plaintiffs' economic interests, which the policies do not cover."); SCA Disposal Services, 1994 WL 879689, at *4 (" [T] here is no causal connection between [the insured's] alleged misrepresentations ... and the property damage at the site."); Kessler, 932 S.W.2d at 737 ("The [insureds'] alleged misrepresentations did not cause the drainage and foundation problems; those problems existed before negotiations began."); see also Brewer, 914 F. Supp. at 14243 ("The alleged misrepresentation of Defendants did not cause property damage. The termites caused the property damage."); Gwin, 658 So. 2d at 428 (" [W]e must conclude that any alleged misrepresentations ... did not cause the [termite damage] .... "); Qualman, 471 N.W.2d at 285 ("There is no question that the defective condition of the house is an ele­ment in the [plaintiffs'] complaint. Nevertheless, those defects cannot be con­sidered the cause of the [plaintiffs'] damages .... ").

224 Baltimore Law Review [Vol. 27

pIe, in Martin v. State Farm Fire & Casualty Co.,m the Court of Ap­peals of Oregon noted that the underlying misrepresentation claim was predicated on property damage in the form of contamination.228

However, the court found that the complaint did not allege that the misrepresentation caused the damage; rather, the complaint alleged that the misrepresentation caused the plaintiffs to buy property that was already damaged.229 Thus, the court found that there was no causal connection between the damage and the misrepresen tation. 230

Regarding the Safeco "occurrence" holding, many courts follow­ing Safeco have focused on the relationship between negligent mis­representation and fraud. For example, in Chatton v. National Union Fire Insurance Co. of Pittsburgh,231 the California Court of Appeals, ad­hering to the rule adopted in Safeco, stated that the rationale for not treating negligent misrepresentation as an accident is that the claim requires an element of intentional action-intent to induce reliance.232 Thus, the tort is a subspecies of fraud.233

As with the opinion in Chatton, most courts following Safeco have held, at least alternatively, that negligent misrepresentation does not constitute an accident and that the damages sought in a negligent misrepresentation action do not constitute property damage.234

In First Wyoming Bank, N.A., Jackson Hole v. Continental Ins. CO.,235 the Supreme Court of Wyoming decided whether, under a CGL, an insurer of a bank had a duty to defend against a claim of negligent

227. 932 P.2d 1207 (Or. Ct. App. 1996). 228. See id. at 1213. 229. See id. 230. See id. 231. 10 Cal. App. 4th 846 (Cal. Ct. App. 1992). 232. See id. at 861. 233. See id. at 861-62 (citing, e.g., Gagne v. Bertran, 275 P.2d 15 (Cal. 1954». 234. See, e.g., Tschimperle v. Aetna Cas. & Sur. Co., 529 N.W.2d 421, 424-25 (Minn.

Ct. App. 1995) (deciding whether investment company's misrepresentations to investors were accidents and whether loss of investment was property damage under CGL, and holding both negligent misrepresentation and damages therefrom do not constitute accident and property damage, respectively). But if. Western Cas. & Sur. Co. v. Hays, 781 P.2d 38, 41 (Ariz. Ct. App. 1989) (fol­lowing majority rule that negligent misrepresentation does not constitute an accident, yet declining to consider the alternative holding that losses were not property damage covered under the policy).

235. 860 P.2d 1094 (Wyo. 1993).

1997] Sheets v. Brethren Mutual 225

misrepresentation involving loans.236 The court added a new per­spective to the Safeco rationale. The court reiterated that the inten­tional element of the claim, inducing reliance, precluded the claim from being an accident.237 The court added, moreover, that the claim asserted against the bank was essentially a breach of contract claim.238 Noting that it had previously construed the term "acci­dent" as not encompassing coverage for breach of contract,239 the court reasoned that the insured bank's attempt to make a distinc­tion between a careful breach, which would not be an accident, and a negligent breach, which would be an accident, was a "unique, cre­ative idea" that finds no support in case law.240

a. Effect of ''Premises Alienated" Exclusion

Every CGL since 1943 has contained a "premises alienated" ex­clusion.241 This exclusion provides that the policy does not cover "property damage to premises alienated by the named insured aris­ing out of such premises or any part thereof .... "242 This exclusion is intended to preclude coverage where the insured fails to disclose the existence of a defect or to repair property prior to its sale. 243

In Stull v. American States Insurance CO.,244 the United States Dis­trict Court for the District of Maryland addressed whether, under

236. See id. at 1099. 237. See id. at 1100 (citing Dykstra v. Foremost Ins. Co., 17 Cal. Rptr. 2d 543 (Cal.

Ct. App. 1993». 238. See id. at 1099. 239. See id. (quoting Action Ads, Inc. v. Great Am. Ins. Co., 685 P.2d 42, 45 (Wyo.

1984) ("We conclude that the coverage clause ... encompasses liability which the law imposes on all insureds for their tortious conduct and not on the lia­bility which a particular insured may choose to assume pursuant to con­tract."» .

240. [d. at 1100 ("The [blank's position seems to be that a careful breach of con­tract is an action only in contract but a negligent breach sounds in both con­tract and tort. We find no law to support this unique, creative idea.").

241. See Tinker, supra note 11, at 278. 242. Tinker, supra note 11, at 278 (1973 CGL); accord Leder, supra note 12, at C-55

(1986 CGL) (precluding coverage for" 'Property damage' to: ... (2) Premises you sell, give away or abandon, if the 'property damage' arises out of any part of those premises .... "); Leder, supra note 12, at C-108 (1996 CGL) (same). Since 1986, the premises alienated, owned property, and care, custody, and control exclusions have been merged into one exclusion. See Leder, supra note 12, at C-55. For a discussion of the premises alienated exclusion, see 2 WINDT, supra note 100, § 11.17, at 291.

243. See Leder, supra note 12, at C-57. 244. 963 F. Supp. 492 (D. Md. 1997) (applying Maryland law).

f'

226 Baltimore Law Review [Vol. 27

Maryland law, a CGL insurer had a duty to defend its insured, a gasoline station owner, against a negligent misrepresentation claim.245 The underlying claim was based on representations made to the purchaser of the station regarding the quality of the ground­water.246 In the declaratory judgment action, the insurer asserted three defenses, including that the premises alienated exclusion pre­cluded coverage.247

The district court held in favor of the insurer, finding that the premises alienated exclusion precluded coverage.248 The court noted that no Maryland court had ever construed the premises alienated clause.249 Relying on Reliance Insurance Co. v. Povia­Ballatine,250 the court found that the exclusion operated to exclude claims based on the sale of the insured's real property regardless of when the alleged wrongful act occurred.251

b. Effect of "Owned Property" Exclusion

CGLs are only designed to cover liability to third persons.252

Thus, CGLs contain provisions that specifically exclude coverage for loss sustained by the insured. One such provision is the "owned property" exclusion.253 With slight modification depending on the version of CGL, this provision excludes coverage for " 'property damage to . . . property owned or occupied by or rented to the insured.' "254

245. See id. at 493. 246. See id. 247. See id. The insurer also asserted that damages were not caused by an occur­

rence, and, even if they were, the pollution exclusion clause precluded cover­age. See id.

248. See id. at 494. 249. See id. 250. 738 F. Supp. 523 (S.D. Ga. 1990). 251. See Stul~ 963 F. Supp. at 494. 252. See, e.g., Leder, supra note 12, at C-56 (citing Bausch & Lomb v. Utica Mut.

Ins. Co., 330 Md. 758,625 A.2d 1021 (1993». 253. See generally Leder, supra note 12, at C-55 (explaining premises alienated,

owned property, and care, custody, and control exclusions have been merged into one exclusion).

254. Tinker, supra note 11, at 275 (1973 CGL); accord Leder, supra note 12, at C-55 (1986 CGL). See generally Goldsborough & Grube, supra note 85, at 3741 (ex­plaining the owned property exclusion); Tinker, supra note 11, at 275-76 (same). Notably, the CGL construed in Sheets contained the owned property exclusion. SeeJoint Record Extract at 91, Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 679 A.2d 540 (1996) (No. 9547, Sept. Term, 1995) (exclusion "q.").

1997] Sheets v. Brethren Mutual 227

In Allstate Insurance Co. v. Chaney,255 the United States District Court for the Northern District of California held that even if negli­gent misrepresentation in the sale of a home amounts to property damage, as opposed to economic loss, such damages are excluded under the owned property exclusion.256 Noting that the insured sell­ers owned the property at the time of the misrepresentation, the Chaney court found no potentiality of coverage for the negligent misrepresen tation claim.257

2. Minority Position: Liability for Negligent Misrepresentations is Covered Under CGLs

A minority of jurisdictions that have addressed the issue hold that CGLs cover liability for negligent misrepresentations.258 To date, these jurisdictions include Iowa, Louisiana, Maryland, Maine, New

255. 804 F. Supp. 1219 (N.D. Cal. 1992) (Armstrong, J.). Note that the two cases providing contrasting constructions of the CGL are from the same federal dis­trict. See infra note 274 and accompanying text.

256. See Chaney, 804 F. Supp. at 1223. 257. See id. Along the same line of reasoning, a Massachusetts court held that per­

sonal injuries inflicted on a purchaser of a home were not covered under the seller's homeowner policy because the injuries manifested after termination of the policy. See Frohberg v. Merrimack Mut. Fire Ins. Co., 612 N.E.2d 273, 275 (Mass. App. Ct. 1993). The Frohberg court addressed a misrepresentation claim in which the plaintiff sought damages for respiratory injury caused by inhaling formaldehyde foam insulation, which the insured seller represented was not present in the home. See id. at 274 & n.l.

258. See First Newton Nat') Bank v. General Cas. Co., 426 N.W.2d 618, 624-26 (Iowa 1988) (finding negligent misrepresentation constitutes an occurrence); Colomb v. United States Fidelity & Guar. Co., 539 So. 2d 940, 942 (La. Ct. App. 1989) (implied holding) (distinguishing between breach of contract and negligent misrepresentation, thereby implying that the latter constitutes an oc­currence); Sheets, 342 Md. at 645, 657, 679 A.2d at 545, 551 (holding negligent misrepresentation constitutes an occurrence if the resulting damage is neither expected nor foreseen, and, under facts, damage was covered by the loss of use prong); Commercial Union Ins. Co. v. Royal Ins. Co., 658 A.2d 1081, 1083 (Me. 1995) (implied holding) (assuming that a policy, if active, would poten­tially cover a negligent misrepresentation claim, thereby implying negligent misrepresentation constitutes an occurrence); SL Indus., Inc. v. American Mo­torists Ins. Co., 607 A.2d 1266, 1276-77 (NJ. 1992) (holding common law fraud may constitute an occurrence so long as the insured did not subjectively intend to inflict the harm alleged, thereby implying that negligent misrepre­sentation constitutes an occurrellce); State Farm Fire & Cas. Co. v. Helminiak, 659 N.E.2d 385, 389 (Ohio Ct. C.P. 1995) (holding that negligent misrepresen­tation constitutes an accident).

228 Baltimore Law Review [Vol. 27

Jersey, and Ohio.259 In First Newton National Bank v. General Casualty Co. of Wiscon­

sin,260 the Supreme Court of Iowa addressed whether, under two separate commercial liability policies,261 an insurer had a duty to de­fend its insured bank against a negligent misrepresentation claim arising from the foreclosures on farm property.262 In the underlying suit, two farm owners brought, inter alia, fraud and negligent mis­representation claims against the bank based on a bank officer's ad­vice to deal with a local irivestor.263 The farm owners asserted their claims as counterclaims when the bank attempted to foreclose on the farms after the investor failed to pay the mortgages that were in his name.264264. See id. at 620-21.

The policies at issue defined "occurrence" as an accident, neither expected nor intended by the insured.265 The court noted that it previously held that a "happening" was neither expected nor intended so long as the insured did not intend or expect both the event and the resulting injury.266 In holding that negligent misrepre­sentation potentially falls within this definition, the court distin­guished between negligent and fraudulent misrepresentation.267 The

259. See supra note 258 (providing precedent). 260. 426 N.W.2d 618 (Iowa 1988). 261. One policy was a multi-peril policy, and the other policy was a commercial

umbrella policy. The multi-peril policy covered property damage, defined to include "loss of the use of tangible property which has not been physically in­jured or destroyed," caused by an occurrence, defined as "an accident ... neither expected nor intended from the standpoint of the insured." [d. at 622. The multi-peril policy also contained a supplemental liability portion that extended coverage to personal injury "to which this insurance applies ... aris­ing out of the conduct of the named insured's business." [d. The umbrella policy covered property damage, defined essentially the same as in the multi­peril policy. See id.

262. See id. at 619-20. 263. See id. at 620-21. The other claims were constructive fraud and violation of the

Iowa Uniform Securities Act. See id. at 621. 265. See id. at 624-25. Each policy phrased the definitions differently, but the court

found the two sufficiently similar to analyze them under the same framework. See id. at 625. .

266. See id. at 625 (citing Ahena v. United Fire & Cas. Co., 422 N.W.2d 485 (Iowa 1988».

267. See id. (quoting Gordon-Gallup Realtors, Inc. v. Cincinnati Ins. Co., 265 S.E.2d 38, 40 (S.C. 1980) (holding that because the policy expressly covers negli­gence, the insurer had a duty to defend against a negligent misrepresentation claim». Notably, the insurance policies construed by the First Newton court did not expressly provide coverage for negligence. In fact, the commercial umbrella policy specifically excluded coverage for "claims arising out of error

1997] Sheets v. Brethren Mutual 229

court reasoned that the former connotes negligent rather than in­tentional conduct, and hence is encompassed under the term "acci­dent. "268 The court then addressed the insurer's assertion that the damages sought in the underlying claim did not allege property damage because there was no physical damage to the property. 269

Pointing to the alternative definitions within both policies, which defined property damage to include loss of the use of property which is not physically injured, the court held that the plaintiffs al­leged such loss by asserting that they will lose their homes, thus the loss of use.270

a. Coverage Under BFE Advertising Injury Endorsement

Between 1973 and 1985, the Broad Form Comprehensive Gen­eral Liability Endorsement (BFE) provided optional endorsements that could be added to the CGL at additional cost. 271 Since 1986, these additional endorsements have been modified and incorpo­rated into the CGL, thereby increasing the scope of coverage.272

One of these additional endorsements, the "advertising injury" en­dorsement, provides coverage for advertising injury.273

In American States Insurance Co. v. Canyon Creek,274 the United States District Court for the Northern District of California held

or omission or a mistake." Id. at 622. 268. See id. at 625. The court also noted that negligent misrepresentation claims

arise in the course of transactions in which the defendant has a pecuniary in­terest. See id. (quoting REsrATEMENT (SECOND) OF TORTS § 552 (1977».

269. See id. at 626. 270. See id. The court stated that its holding was in step with the majority of courts

which have addressed the property damage issue. See id. Notably, however, the opinions cited by the court primarily dealt with another issue: pecuniary loss as a loss of use. See, e.g., Continental Cas. Co. v. Gilbane Bldg. Co., 461 N.E.2d 209, 212-13 (Mass. 1984), cited in First Newton Nat'[ Bank, 426 N.W.2d at 626.

27l. See Keville, supra note 3, at 926; Leder, supra note 12, at C-2. 272. See Keville, supra note 3, at 926; Leder, supra note 12, at C-2. 273. See Keville, supra note 3, at 926. The BFE did not contain the advertising in­

jury endorsement until 1981. See id. The advertising injury endorsement pro­vides coverage for, inter alia, " 'injury aris[ing] out of libel, slander, defama­tion, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan.' " See Keville, supra note 3, at 926 (quoting 1981 BFE advertising injury endorsement). The 1986 CGL incorporates a modified version of the BFE, but it does not include coverage for defamation, piracy, and unfair competition. See Keville, supra note 3, at 927.

274. 786 F. Supp. 821 (N.D. Cal. 1991) (Orrick, J.). Note that the two cases provid­ing contrasting constructions of the CGL are from the same federal district. See supra note 255 and accompanying text.

230 Baltimore Law Review [Vol. 27

that the BFE advertising injury endorsement covered negligent mis­representation claims.275 The court noted that although negligent misrepresentation does not constitute an occurrence,276 and dam­ages sought were excluded economic losses,277 the claims were cov­ered under the advertising injury endorsement-which included the term "unfair competition. "278

b. Coverage Under Commercial Umbrella Policy In Universal Underwriters Insurance Co. v. Youngblood,279 the Su­

preme Court of Alabama addressed whether, under a commercial umbrella policy280 explicitly providing that the term "occurrence" includes negligence, an insurer had a duty to defend its insured, a car dealership.281 In the underlying suit, employees of the insured alleged breach of employment contract, negligent hiring, and negli­gent misrepresentation, all of which arose from miscalculation of sales commissions and failure to pay insurance premiums as obli­gated.282 The Youngblood court held that because the term "accident" does not exclude negligent actions, the insurer had a duty to de­fend its insured.283 Notably, however, the policy in question explic­itly included coverage for negligent administration of the sort al­leged in the underlying suit.284

275. See Canyon Creek, 786 F. Supp. at 827. The language was from the 1981 BFE. See supra note 273 (quoting 1981 BFE advertising injury endorsement). See Keville, supra note 3, for an in-depth discussion of all advertising injury provi-sions.

276. See Canyon Creek, 786 F. Supp. at 825. 277. See id. 278. See id. at 827. Note that the 1986 CGL, which incorporates much of the BFE,

does not include coverage for unfair competition. See supra note 273. 279. 549 So. 2d 76 (Ala. 1989). 280. Commercial umbrella policies are relatively inexpensive policies designed to

protect against rare catastrophic loss in the form of excess judgments. See Lisa K. Gregory, Annotation, "Excess" or "Umlffella" Insurance Policy as Providing Cov­erage for Accidents with Uninsured or Underinsured Motorists, 2 A.L.R.5th 922 (1992).

281. See Youngblood, 549 So. 2d at 77-78. 282. See id. at 77. 283. See id. at 78-79. 284. See id. The policy included coverage for negligent administration of the in­

sured employer's profit sharing, medical, hospitalization, and life insurance benefits programs. See id.

1997] Sheets v. Brethren Mutual 231

c. Coverage for Common Law Fraud Under CGL

In SL Industries, Inc. v. American Motorists Insurance CO.,285 the Su­preme Court of New Jersey analyzed a CGL to determine whether an insurer had a duty to defend its insured against a claim for statu­tory age discrimination and common law fraud. 286 An employee al­leged that the CEO of the insured corporation induced the em­ployee's early retirement by fraudulently misrepresenting the elimination of his position.287 Mter settling the claim, the insured corporation brought a declaratory judgment action against its in­surer seeking a declaration that both the CGL and Comprehensive Catastrophe Liability Policy covered the claims, thereby requiring the insurer to indemnify it for the cost of litigation and settlemen t. 288

The Supreme Court of New Jersey first disposed of the statu­tory age discrimination claim, holding that because the statute de­nied compensatory damages for emotional injuries caused by age discrimination, neither policy would cover this type of claim.289 The court then addressed whether the policies' provisions providing cov­erage for an occurrence could encompass the common law fraud claim. Both policies defined "occurrence" as "an accident ... neither expected nor intended from the standpoint of the in­sured. "290 The court noted that fraud has an intentional aspect, the intent to induce reliance on the false representation, which consti­tutes a subjective intent to injure.29I Nonetheless, the court rea­soned that in the context of insurance law, the intent to injure would not necessarily preclude the act from being deemed an accident. 292

285. 607 A.2d 1266 (NJ. 1992). 286. See id. at 1269. 287. See id. The employee, an executive who agreed to retire on his 62nd birthday,

alleged that the company hired a younger replacement several months before his departure. See id.

288. See id. at 1270. The corporation settled the claim for $430,000 and spent ap­proximately $100,000 defending the suit. See id.

289. See id. at 1271. 290. [d. at 1269-70. The difference between the two policies was that the CGL pro­

vided coverage for bodily injury, defined as "injury, sickness or disease," while the Comprehensive Catastrophe Liability Policy provided coverage for per­sonal injury, defined to include "humiliation." [d. at 1269-70.

291. See id. at 1277. 292. See id. (suggesting that there may be a middle ground between the two ex­

tremes, i.e., between purely subjective and objective tests).

232 Baltimore Law Review [Vol. 27

The court recited three possible interpretations of the defini­tion of "accident" previously espoused by New Jersey courts: (1) that the s4bjective intent to injure precludes coverage because the act is not accidental, even if the injury inflicted differed from that intended;293 (2) that if the intentional act had the inherent probability of inflicting the degree of harm actually incurred, cover­age would be denied-if it did not, the court would ascertain whether the actor intended the harm;294 and (3) that an accident will be found unless the actual harm inflicted conforms precisely with what the actor was substantially certain would result.295 In de­termining which approach to adopt, the court attempted to satisfy the two competing aims of New Jersey insurance law: compensating victims and deterring intentional wrongdoing.296

The court adopted the second approach, which inquires into the subjective intent of the actor when the harm sustained is not an inherent probability of the action, and precludes coverage when the harm is a probable outcome of the action.297 Applying this approach to the fraud claim in the underlying suit, the court noted that in a wrongful discharge context, courts are reluctant to impute an intent to cause bodily harm.298 Thus, the court remanded the case back to the trial court to determine if the officer who had made the fraudu­lent representation had subjectively intended to cause the em­ployee's emotional distress.299

III. SHEETS v. BRETHREN MUTUAL

In Sheets v. Brethren Mutual Insurance CO.,300 the Court of Appeals of Maryland addressed an issue of first impression under Maryland

293. See id. This view is referred to as the "Lyons" test, named after the opinion in which it was espoused. See generally Lyons y. Hartford Ins. Group, 310 A.2d 485, 488-89 (NJ. Super. Ct. App. Diy. 1973).

294. See SL Indus., 607 A.2d at 1277-78 (citing Prudential Property & Cas. Ins. Co. y. Karlinski, 598 A.2d 918 (NJ. Super. App. Diy. 1991». The SL Industries court stated, "[W] hen the result of an action conforms to that which one would predict," no further inquiry is needed; the act is not encompassed under the rubric of "accident." Id. at 1278.

295. See id. at 1278 (citing Hanover Ins. Group y. Cameron, 298 A.2d 715 (NJ. Super. Ct. Ch. Diy. 1973».

296. See id. 297. See id. 298. See id. at 1278-79. Presumably, this reluctance promotes the public policy of

ensuring satisfaction of judgments in favor of victims. See generally id. 299. See id. at 1279. 300. 342 Md. 634, 679 A.2d 540 (1996).

1997] Sheets v. Brethren Mutual 233

law: whether a CGUOI insurer has a duty to defend against a claim of negligent misrepresentation.302

In the underlying suit, the plaintiffs, purchasers of a farm, al­leged intentional and negligent misrepresentation claims against the insured sellers, the Sheetses.303 The Sheetses represented that the farm house septic system was in working condition, when in fact it was inadequate.304 Three weeks after the purchasers moved into the farm house, the septic system failed. 305 When the purchasers brought suit, the Sheetses contacted their CGU06 insurer, Brethren Mutual Insurance Company, and requested that it fund the defense against the negligent misrepresentation claim.307 Brethren denied the request, contending the policy did not cover misrepresentation torts.308 Thereafter, the Sheetses brought a declaratory judgment ac­tion against Brethren, requesting the court to declare that Brethren must reimburse the Sheetses for the cost of defending the suit.309

At trial, the circuit court granted summary judgment in favor of Brethren.3lO The court found that there was a lack of a causal nexus between the negligent misrepresentation and the damage to the septic system.311 Alternatively, the court held that the damages alleged in the underlying suit were economic losses excluded under

301. The policy at issue in Sheets was a farm owner's general liability policy. See id. at 640, 679 A.2d at 541-42. See generally supra note 18 (noting that a farm owner's liability policy is merely a slightly modified CGL).

302. See id. at 637, 645, 679 A.2d at 541, 545. 303. See id. at 637, 679 A.2d at 541. 304. See id. 305. See id. 306. The policy was a farm owner's liability policy. See generally supra note 18 (not­

ing that a farm owner's liability policy is merely a slightly modified CGL). 307. See Sheets, 342 Md. at 637-38, 679 A.2d at 541-42. The Sheetses conceded that a

clause in the policy excluding coverage for intentional acts precluded cover­age for the intentional misrepresentation claim. See id. at 637 n.1, 679 A.2d at 541 n.1. See generally supra note 54 and accompanying text (noting that if the complaint alleges one claim that is covered under the policy, the insurer must usually provide a defense against all claims, including those not covered).

308. See Sheets, 342 Md. at 638, 679 A.2d at 542. 309. See id. Originally, the Sheetses sought a declaration that Brethren was re­

quired to defend and indemnify the Sheetses if a judgment was entered against them in the underlying suit. See id. However, the Sheetses settled the underlying suit before the case reached the court of appeals. See id. Because the record did not include the details of the settlement, the court of appeals limited its decision to Brethren's duty to defend. See id.

310. See id. 311. See id. at 643, 679 A.2d at 544.

234 Baltimore Law Review [Vol. 27

the policy.312 During a pending appeal, the court of appeals granted certiorari on its own motion.313

In considering the stope of Brethren's duty to defend, the court of appeals began by applying the comparison test. 314 First, the court noted that the CGU15 provided coverage for property damage caused by an occurrence.316 The CGL defined "occurrence" as an accident; it defined "property damage" as either "[p] hysical injury to tangible property, including all resulting loss of use of that prop­erty," or "[1] oss of the use of tangible property that is not physically injured."317 The policy also contained a standard duty to defend clause which provided that Brethren had the right and duty to de­fend any suit seeking damages covered under the pOlicy.318

Proceeding to the second step of the comparison test, the court addressed the circuit court's causation analysis.319 The court of ap­peals reiterated its precedent addressing causation and the duty to defend.320 As long as a plaintiff's complaint alleges liability that is potentially covered by the policy, the court reiterated, an insurer has an obligation to defend its insured, no matter how illogical or attenuated the claim.321 Hence, the court found that any defense of causation should be asserted against the plaintiffs in the underlying suit, not by the insurer against its insured in an attempt to escape its duty to defend.322

Continuing with the second step, the court examined whether a negligent misrepresentation could constitute an accident. 323 The court first addressed Brethren's contention that the loss incurred by

312. See Joint Record Extract at 33, Sheets (No. 9547). 313. See Sheets, 342 Md. at 638, 679 A.2d at 542. See generally MD. RULE 8-304(a)

(grartting the court of appeals authority to grant certiorari on its own motion while cases are pending before the court of special appeals).

314. See Sheets, 342 Md. at 640, 679 A.2d at 54243. For an in-depth discussion of the comparison test, see supra notes 69-80 and accompanying text.

315. The policy was a farm owner liability policy. See generally supra note 18 (noting that a farm owner's liability policy is merely a slightly modified CGL).

316. See Sheets, 342 Md. at 640, 679 A.2d at 543. 317. Id. at 641,679 A.2d at 543. 318. See id. at 640, 679 A.2d at 543. See generally supra text accompanying note 85

(quoting CGL duty to defend clause). 319. See Sheets, 342 Md. at 643, 679 A.2d at 544. 320. See id. at 64345, 679 A.2d at 54445. 321. See id. at 643, 679 A.2d at 544 (citing 7C APPLEMAN, supra note 18, § 4686, at

172 (noting that an insurer is not generally permitted to contradict matters al­leged in the underlying suit to defeat its duty to defend».

322. See id. at 644, 679 A.2d at 545. 323. See id. at 654, 679 A.2d at 550.

1997] Sheets v. Brethren Mutual 235

the purchasers was economic loss and not encompassed under the rubric of "property damage. "324 The court accepted, as the Sheetses conceded in the circuit court, that the money spent by the purchas­ers to repair the septic system constituted excluded economic 10ss.325 Conversely, the court noted that the policy also defined "property damage" as the " '[1] oss of use of tangible property which is not physically injured.' "326 Because the essence of the purchasers' claim rested on the inability to use the septic system, the court con­cluded, the claim asserted a loss of use covered under the policy.327

Next, the court analyzed whether the term "accident" encom­passed negligent misrepresentations. Because negligent misrepresen­tations are a form of negligence, the court reasoned that it had to first determine whether negligence, as a category of events, could constitute an accident.328 The court noted that it had previously ad­dressed whether a negligent act constituted an accident under other policies.329 Upon close examination of its Harleysvil[e330 opinion, how­ever, the court found support for two distinct definitions of the

324. See id. at 64546, 679 A2d at 545. 325. See id. See generaUy supra note 89 (defining "economic loss"). 326. Sheets, 342 Md. at 64546, 679 A2d at 545. 327. See id. The court's analysis of the property damage issue totals two paragraphs

and contains no citations to authority:

Id.

Next, we must determine whether the trial judge was legally correct in holding that the damages to the septic system were not covered as "prop­erty damage" under the policy. The Sheetses concede that the money spent to fix the system was economic loss and thus not covered under the policy as property damage.

Also included within the policy's definition of property damage, however, is "[I] oss of use of tangible property that is not physically injured." The Sheetses argue that the trial judge failed to look beyond the allegation of economic loss to see that the complaint alleged property damage in terms of a loss of use of the septic system to the [purchasers]. We agree. The [purchasers] claim they were deprived of the use of their septic sys­tem. This alleged "loss of use" was property damage as defined in and covered by the Brethren policy. The trial court therefore erred as a mat­ter of law on this issue.

328. See id. at 646, 679 A2d at 546. 329. See id. at 650-51, 679 A2d at 54748 (citing State Farm Mut. Auto Ins. Co. v.

Treas, 254 Md. 615, 255 A2d 296 (1969), Harleysville Mut. Ins. Co. v. Harris & Brooks, Inc., 248 Md. 148, 235 A2d 556 (1967), and Haynes v. American Cas. Co., 228 Md. 394, 179 A2d 900 (1962». See supra notes 133-75 and accompa­nying text for an in-depth discussion of Maryland precedent addressing the term "occurence."

330. 248 Md. 148, 235 A2d 556 (1967).

236 Baltimore Law Review [Vol. 27

term "accident," only one of which could ever encompass a negli­gent act.331 The court restated the two definitions: (1) an accident is an event that takes place without one actually foreseeing or expect­ing the result; and (2) an accident is an event that takes place which one should not have expected or foreseen. 332 The first defini­tion focuses on the subjective foresight of the insured.333 The sec­ond definition requires an objective analysis, thereby essentially eliminating the potentiality that the policy covers a negligence claim.334 In selecting which definition to adhere to, the court at­tempted to determine which definition a reasonably prudent layper­son would attach to the term "accident."335 The court found that the subjective standard was more in accord with such expectations, and hence held that an accident was "an event that takes place without the insured's foresight or expectation."336 The court added that if it adopted the objective standard, then insurance policies em­ploying the term "accident" would be rendered meaningless.337

The court of appeals next addressed whether, given that negli­gence could constitute an accident, a negligent misrepresentation could constitute an accident.338 The court noted the split among other jurisdictions which have faced this issue.339 The court of ap­peals explained that in jurisdictions that have precluded coverage, courts have generally held that because the cause of action for neg­ligent misrepresentation requires an intentional element, inducing

331. See Sheets, 342 Md. at 651-52, 679 A.2d at 548. 332. See id. at 651, 679 A.2d at 548. 333. See id. 334. See id. Because negligence is measured by an objective standard, if the term

"accident" is also measured by such a standard, then, a fortiori, an accident could never be a negligent act. See generally id. But see 7A APPLEMAN, supra note 18, § 4492.03, at 38 (noting the rebuttable presumption under tort law, that persons intend ordinary consequences of their acts, does not apply in insur­ance coverage disputes).

335. See Sheets, 342 Md. at 652, 679 A.2d at 549 (citing Sullins v. Allstate Ins. Co., 340 Md. 503, 508, 667 A.2d 617, 619 (1995».

336. Id. at 652, 679 A.2d at 548 (quotations omitted) (emphasis added). The court noted its disagreement with two courts that adopted the objective standard. See id. at 654 n.4, 679 A.2d at 550 n.4 (overruling Ed. Winkler & Son, Inc. v. Ohio Cas. Ins. Co., 51 Md. App. 190,441 A.2d 1129 (1982), and noting disap­proval of IA Constr. Corp. v. T & T Surveying, Inc., 822 F. Supp. 1213 (D. Md. 1993) ).

337. See id. at 653, 679 A.2d at 549. 338. See id. at 654, 679 A.2d at 550. 339. See id. at 655, 679 A.2d at 550.

1997] Sheets v. Brethren Mutual 237

reliance, it cannot constitute an accident.34o Moreover, the court noted, the California cases holding the term "accident" does not encompass negligent misrepresentations rely on California's recogni­tion of negligent misrepresentation as a subspecies of fraud. 341

Under Maryland law, however, the court of appeals pointed out that it has repeatedly refused to extend fraud to encompass liability for negligence.342 In accordance with its reaffirmation that negligence may constitute an accident, the court held that a negligent misrep­resentation may also be an accident if the resulting injury or dam­age is an event that takes place without the insured's foresight or expectation.343 The court reasoned that the intentional aspect of the tort-inducing reliance-was not dispositive because both the falsity of the statement and the resulting damage may be accidental. 344 Be­cause the court held that negligent misrepresentation could consti­tute an accident, and because the court found the underlying claim alleged property damage under the loss of use prong, the court or­dered Brethren to reimburse the Sheetses for the costs incurred de­fending the underlying suit.345

In a dissenting opinion, Chief Judge Murphy and Judge Kar­wacki noted their disagreement with the majority's holding that negligent misrepresentation may constitute an accident on two grounds.346 First, they reasoned that negligent misrepresentation has two intentional aspects-assertion and inducing reliance-either of which preclude encompassing the tort under the rubric of "acci­dent" in insurance policies.347 To assert,the dissenters reasoned, is not to accidentally blurt; it is "[ t] 0 state as true [,] declare [, or] maintain. "348 The dissenters contended that their position is consis­tent with the common understanding that voluntary verbal state­ments cannot be considered accidents as the term is used in insur­ance policies.349 Similarly, Chief Judge Murphy and Judge Karwacki

340. See id. at 656, 679 A.2d at 550-5l. 341. See id. at 656, 679 A.2d at 550 (citing, e.g., Chatton v. National Union Fire Ins.

Co., 13 Cal. Rptr. 2d 318,328 (Ct. App. 1992». 342. See id. at 656, 679 A.2d at 550-51 (citing Ellerin v. Fairfax Sav., 337 Md. 216,

238-39,652 A.2d 1117, 1128 (1995». 343. See id. at 657, 679 A.2d at 551. 344. See id. 345. See id. at 658, 679 A.2d at 551. 346. See id. at 658-59, 679 A.2d at 552 (Murphy, CJ., & Karwacki,]., dissenting). 347. See id. at 661, 679 A.2d at 552-53 (Murphy, CJ., & Karwacki,]., dissenting). 348. Id. at 660, 679 A.2d at 552 (Murphy, Cj., & Karwacki,]., dissenting) (quoting

BlACK'S LAw DICTIONARY 116 (6th ed. 1990». 349. See id. at 660, 679 A.2d at 553 (Murphy, CJ., & Karwacki,]., dissenting).

238 Baltimore Law Review [Vol. 27

continued, intent to induce reliance cannot be considered acciden­tal,350 Though some negligent actions involve volitional aspects,351 they noted that the "inducing reliance" element of negligent mis­representation entails a designed and intended outcome, hence in­consistent with the concept of an accident.352

Chief Judge Murphy and Judge Karwacki's second basis for dis­senting focused on basic principles of construction.353 They reiter­ated that words are to be given the meaning that a reasonably pru­dent layperson would attach to them.354 They criticized the majority for engaging in tortured legal construction and stated firmly that negligent misrepresentation is clearly not an accident. 355

IV. ANALYSIS

A. The Sheets Court Misconstrued the "Loss of Use" Prong to Cover Ex­cluded Economic Loss

The Court of Appeals of Maryland wrongly decided Sheets be­cause it failed to recognize that the underlying negligent misrepre­sentation claim, like most negligent misrepresentation claims, al­leged liability for economic loss of the sort not covered under CGLs.356This misconstruction of the policy, specifically the "loss of

350. See id. at 660-61, 679 A.2d at 553 (Murphy, CJ., & Karwacki, J., dissenting). 351. See id. at 661 n.1, 679 A.2d at 553 n.1 (Murphy, CJ., & Karwacki, J., dissent­

ing) (noting, e.g., a simple negligence claim may arise from negligently hitting someone with a rock-the throwing is intentional but the resulting injury is not).

352. See id. at 661, 679 A.2d at 553 (Murphy, CJ., & Karwacki, J., dissenting). 353. See id. at 662, 679 A.2d at 553 (Murphy, CJ., & Karwacki, J., dissenting). 354. See id. (Murphy, CJ., & Karwacki, J., dissenting) (quoting Sullins v. Allstate

Ins. Co., 340 Md. 503, 508, 667 A.2d 617, 619 (1995». 355. See id. at 662, 679 A.2d at 553 (Murphy, CJ., & Karwacki, J., dissenting). 356. Cf, e.g., Aetna Cas. & Sur. Co. v. Cotter, 522 N.E.2d 1013, 1014 (Mass. Ct.

App. 1988) ("Although one might imagine a misrepresentation, for example concerning the wholesomeness of food or strength of a tree limb, which would cause bodily injury, generally a misrepresentation is an incorporeal tort, like defamation, which does not cause bodily injury or property damage inde­pendent of conditions or acts which themselves are the consequences of negligence.").

Indeed, in light of the Court of Appeals of Maryland's declaration in Weis­man v. Connors, 312 Md. 428, 540 A.2d 783 (1988), the plaintiff in a negligent misrepresentation claim always seeks redress for economic loss. See supra notes 195-202 and accompanying text (discussing Weisman).

The Sheets court correctly noted that liability policies generally do not pro­vide coverage for economic loss. See id. at 654, 679 A.2d at 545 (implied hold-

1997] Sheets v. Brethren Mutual 239

use" prong, resulted from two errors by the Sheets court: (1) the court failed to methodically apply its rules of construction to the loss of use prong; and (2) the court construed the loss of use prong in isolation, thereby overlooking the substantial limiting effect of the "loss of use" exclusion.

ing} ("The Sheetses concede that the money spent to fIx the system was eco­nomic loss and thus not covered under the policy as property damage."). Economic loss is the loss of an expectancy interest created by contract. See supra note 89 (defIning the term "economic loss"). A plaintiff asserting a cause of action for negligent misrepresentation, unlike an ordinary negligence claim, seeks either benefIt-of-the-bargain or out-of-pocket damages, both con­tractually-based remedies. See supra notes 202"()6 and accompanying text (out­lining damages calculation in negligent misrepresentation claims under Mary­land law); DAN B. DOBBS, THE LAw OF REMEDIES, § 9.2(1}, at 695 (2d ed. 1993) (noting that benefIt-of-the-bargain damages in misrepresentation claims are exactly like expectancy damages in contracts claims); id. § 9.2(2}, at 697-98 (noting that out-of-pocket damages have practical effect of rescission for mis­take, a contract remedy). Notably, neither form of relief seems appropriate for a suit in which the plaintiff and defendant are not in privity of contract or when relief is sought for bodily injury. However, the court in Hinkle v. Rockville Motor Co., 262 Md. 502, 278 A.2d 42 (1971), stated, "[T]he action is one of tort rather than contract and ... it has always been recognized that tort reme­dies are designed to compensate for actual harm suffered." [d. at 505, 278 A.2d at 44. Where appropriate, therefore, that passage supports calculation of damages by traditional tort measures. See id.; see also Village of Cross Keys, Inc. v. United States Gypsum Co., 315 Md. 741, 756, 556 A.2d 1126, 1133 (l989) (" [T]he tort [of negligent misrepresentation] will lie for the recovery of pecu­niary losses, as well for physical harm.").

Contractually-based remedies are awarded in negligent misrepresentation suits because the duty to speak with reasonable care most commonly arises be­tween parties in privity of contract. See KEETON ET AL., supra note 178, § 107, at 105 (Supp. 1988) ("The most common example of the duty to speak with rea­sonable care will undoubtably be grounded in a business or professional rela­tionship or one in which there is a pecuniary interest."). Compare Weisman v. Connors, 312 Md. 428, 540 A.2d 783 (1988) (addressing negligent misrepre­sentation claim based on employment contract), with Virginia Dare Stores v. Schuman, 175 Md. 287, 1 A.2d 897 (1938) (addressing negligent misrepresen­tation claim based on duty owed to business invitee). See generally First Wyo. Bank v. Continental Ins. Co., 860 P.2d 1094, 1099 (Wyo. 1993) (noting that lia­bility insurance under Wyoming law does not encompass coverage for contrac­tual obligations). Undoubtably, the availability of both contract and tort reme­dies for the same harm complicates a court's inquiry into the scope of an insurer's duty to defend and, ultimately, to indemnify. Cf KEETON ET. t\L, supra note 178, § 92, at 655 ("The availability of both [tort and contract] liability for precisely the same kind of harm has brought about confusion and unneces­sary complexity."), cited in Weisman, 312 Md. at 456 n.4, 540 A.2d at 797 n.4.

240 Baltimore Law Review [Vol. 27

First, the court's reliance on the fact that the purchasers in the underlying suit alleged a loss of use was completely unsupported by reference to precedent.357 Thus, the court violated an important rule of construction. Because no controlling authority had con­strued the loss of use prong, the court of appeals should have in­quired: "What is the customary and normal meaning of ["loss of use"] in the context of the [CGL]?"358 The Sheets court did not in­quire into the customary and ordinary use of the term "loss of

357. See supra note 327 (quoting court's entire analysis). 358. Collier v. MD-Individual Practice Ass'n, 327 Md. 1, 6, 607 A.2d 537, 539

(1992). For an in-depth analysis of the rules regarding construction of terms in insurance policies, see supra notes 24-47 and accompanying text.

The Sheets court failed to address the court of special appeals's decision in Pyles v. Pennsylvania Manufacturers' Ass'n Ins. Co., 90 Md. App. 320, 600 A.2d 1174 (1992), the only Maryland precedent that has addressed the term "prop­erty damage." Indeed, the circuit court judge relied on Pyles in holding that the underlying claim was not covered because of a lack of causal nexus. See Joint Record Extract at 32, Sheets (No. 95-47) ("I am persuaded by the author­ity that has been cited in the Pyles case and the Safeco case. There appears to be no causal nexus."). The Sheets court rejected the "lack of causal nexus" holding because it found such reasoning violated the potentiality rule. See gen­erally Brohawn v. Transamerica Ins. Co., 276 Md. 396, 408, 347 A.2d 842, 850 (1975) (construing duty to defend clause to obligate insurer to defend if there is a potentiality that the policy may cover a claim).

In Pyles, the court of special appeals held that property damage to a home that was razed by fire was not covered under a builder's CGL because the ba­sis of the claim was not that the builder caused the fire; the basis was breach of contract: the builder failed to perform its contractual obligation to get the agreed amount of insurance. See Pyles, 90 Md. App. at 325, 600 A.2d at 1177. See generally supra notes 104-16 and accompanying text (providing full discus­sion of Pyles). Thus, although there was property damage-the burned build­ing-there was no allegation of a causal nexus between the damage and any action by the insured. See Pyles, 90 Md. App. at 325, 600 A.2d at 1177; cf. State Farm Fire & Cas. Co. v. Brewer, 914 F. Supp. 140, 142-43 (S.D. Miss. 1996) ("The alleged misrepresentation of Defendants did not cause property dam­age. The termites caused the property damage."). See generally supra notes 226-30 and accompanying text (discussing courts which have found the lack of a causal nexus to property damage precludes coverage for negligent misrepre­sentation claims).

The Sheetses apparently avoided the impact of Pyles by pointing out that the underlying plaintiffs claimed that the Sheetses caused them to purchase an inadequate septic system, as opposed to an already damaged system, which was subsequently damaged because of overuse. See Sheets, 342 Md. 643, 679 A.2d at 544. Therefore, because the use of the septic system was alleged to have been in reliance of the misrepresentation, hence caused by it, the Sheets court found the claim alleged a causal nexus. See id. at 645, 679 A.2d at 545.

1997] Sheets v. Brethren Mutual 241

use."359 As further developed below, the implicit definition adopted by the court, that a loss of use occurs whenever the plaintiff can point to tangible property that he has been deprived of because of economic loss,360 is too encompassing and illogical. In short, the court negated a basic limitation in the policy-that economic loss is generally excluded.361

As the opinions cited elsewhere in Sheets demonstrate, the loss of use prong has been interpreted in two divergent manners.362 The majority of jurisdictions that have addressed this issue have con­cluded that the loss of use prong does not encompass the loss of property due to negligent misrepresentations.363 Otherwise, the ma­jority of courts have reasoned, the economic loss limitation would be meaningless.364 The minority position was espoused in First Newton National Bank.365 The First Newton court found that the plain­tiffs' loss of the use of their farm homes because of foreclosure con-

359. See generally Bausch & Lomb, Inc. v. Utica Mut. Ins. Co., 330 Md. 758, 779, 625 A.2d 1021, 1031 (1993) (noting terms are given ordinary, customary meaning).

360. See generally, e.g., First Newton Nat'l Bank v. General Cas. Co., 426 N.W.2d 618, 626 (1988) (finding that because farm owners alleged they were in danger of losing their homes, they alleged property damage in the form of loss of use).

361. Cf Bailer v. Erie Ins. Co., 344 Md. 515, 536, 687 A.2d 1375, 1385 (1997) (Chasanow, J., dissenting) ("In straining to provide insurance coverage for a 'peeping Tom' with a video camera, this [c]ourt nullifies a specific limitation of coverage in an insurance policy.").

362. Compare First Newton Nat'[ Bank, 426 N.W.2d at 626 (holding that although the claim sought economic loss, the loss of use provision encompassed the claim because farm owners contended they will be ejected from their homes), with Safe co Ins. Co. v. Tozier, No. CIV.A.93-2453-CTV, 1994 WL 476304 (D.Kan. Aug. 16, 1994) (reasoning that the claim did not arise from property damage, it arose from already defective conditions, hence relief sought was merely eco­nomic loss).

363. Compare General Ins. Co. v. Western Am. Dev. Co., 603 P.2d 1245, 1247 (Or. Ct. App. 1979) (holding a loss of use was not alleged despite insured seller's mis­representation concerning extent of easement) (majority position), with First Newton Nat'[ Bank, 426 N.W.2d at 626 (holding loss of use alleged by farm owners because they contended that they will be ejected from their homes) (minority position).

364. See, e.g., Sting Sec., Inc. v. First Mercury Syndicate, Inc., 791 F. Supp. 555, 562 (D. Md. 1992) (Motz, J.) (applying Virginia law). In Sting, Judge Motz opined that the plaintiff might argue that a loss of use was alleged because the eco­nomic loss hampered the ability to efficiently use other products. See id. None­theless, he concluded that "[s]uch an argument would be extremely weak." Id.

365. 426 N.W.2d 618 (1988). To date, no other jurisdiction has followed the minor­ity position.

242 Baltimore Law Review [Vol. 27

stituted property damage covered under the policy.366 This conclu­sion, however, judicially expands the scope of coverage beyond the perimeters of the policy.367 Likely, it will either lead to anomalous, untenable results or will be abandoned or modified by the court of appeals in the future.368

The drafters of the CGL intended for the loss of use prong to cover a narrow risk. The classic example provides that if the in­sured's negligence causes a store's entrance to be blocked, the lia­bility for the loss of use of the store would be covered property damage under the loss of use prong.369 Nonetheless, this narrow coverage was not intended to transform CGLs into performance bonds.370 Specifically, the loss of use occasioned by the failure of property to perform as warranted was not intended to be covered under the loss of use prong.371

Secondly, the Sheets court construed the loss of use prong in isolation, ignoring the loss of use exclusion.372 The loss of use exclu­sion limits the coverage afforded by the loss of use prong to the "loss of use of other tangible property resulting from sudden or acci­dental injury to or destruction of the ... insured's product or

366. See id. at 626. 367. Cf First Wyo. Bank v. Continental Ins., 860 P.2d 1094, 1100 (Wyo. 1993) (find­

ing the distinction between a negligent and a careful breach of contract a "unique, creative idea" without support in case law); Sting, 791 F. Supp. at 562 (finding this line of reasoning "extremely weak").

368. Cf supra notes 87-93 and accompanying text (chronicling the history of re­drafting the CGL to thwart judicial construction encompassing coverage for economic loss). See infra notes 410-11 and accompanying text for a proposal to adopt the more reasoned construction of the loss of use prong and related exclusions in Woodfin Equities Corp. v. Harford Mutual Insurance Co., 110 Md. App. 616, 678 A.2d 116 (1996) (Wilner, CJ., joining majority opinion), Tr!IJ'd in part on other grounds, 344 Md. 399, 415, 687 A.2d 652, 659 (1997). See grneraUy supra notes 117-32 (providing in-depth discussion of Woodfin).

369. See supra note 98 and accompanying text. 370. Cf IA Constr. Corp. v. T & T Surveying, Inc., 822 F. Supp. 1213, 1215 (D. Md.

1993) ("This is the stuff of the construction trade (and of professional mal­practice insurance), not a risk protected against by a general liability policy."); Vasicheck, supra note 3, at 804 n.47 ("[L]iability insurance policies are not meant to be performance bonds."). See supra notes 169-75 for discussion of IA Construction Corp.

371. See, e.g., Sting Sec., Inc. v. First Mercury Syndicate, Inc., 791 F. Supp. 555, 562 (D. Md. 1992) (Motz, J.) (applying Virginia law). See gemraUy supra note 364 (discussing Sting).

372. For a discussion of the loss of use exclusion, see supra notes 99-103 and ac­companying text.

1997] Sheets v. Brethren Mutual 243

work. "373 The loss of use found by the Sheets court was not of other tangible property. It was the insured's product-the septic system.374

B. The Sheets Court Correctly Concluded CGLs Generally Provide Cover­age for Ordinary Negligence

In their dissent, Chief Judge Murphy and Judge Karwacki ob­served that the majority unnecessarily addressed whether the term "accident" encompassed negligence. 375 The majority's dicta, how­ever, clarified the viability of CGL coverage for negligent acts. 376

The new rule, that negligent acts constitute an accident so long as the resulting damage is neither expected nor intended from the standpoint of the insured, effectuates the reasonable expectations of the prudent layperson.377 The dissenters' admonishment that this rule plunges a court's inquiry into the dreaded Serbonian Bog,378 moreover, cannot be avoided. Negligent acts, as opposed to negli­gent omissions, necessarily require a court to separate the means from the end because acting itself is intrinsically intentional.379 In a negligence context, moreover, this dichotomy is natural and in step with reasonable expectations of the reasonably prudent layperson.38o

373. E.g., Neeson & Meyer, supra note 1, at 79; see also Tinker, supra note 11, at 233-34; Vasicheck, supra note 3, at 804 n.47.

374. Cf Century I Joint Venture v. United States Fidelity & Guar. Co., 63 Md. App. 545, 553-57, 493 A.2d 370, 374-77 (1985) (holding that condominiums consti­tuted "products" sold by insured).

375. See Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 661, 679 A.2d 540, 553 (1996) (Murphy, Cj., & KaIWacki, j., dissenting).

376. See, e.g., Harleysville Mut. Ins. Co. v. Harris & Brooks, Inc., 248 Md. 148, 235 A.2d 556 (1967) (supporting both subjective and objective approaches), cited in Sheets, 342 Md. at 651, 679 A.2d at 548.

377. See Sheets, 342 Md. at 652, 679 A.2d at 548. 378. See id. at 661-62, 679 A.2d at 553 (Murphy, CJ., & KaIWacki, j., dissenting) (cit­

ing Landress v. Phoenix Mut. Life Ins. Co., 291 U.S. 491, 499 (Cardozo, J., dis­senting»; supra note 144 (explaining the Serbonian Bog referen.ce).

379. For a comprehensive discussion regarding CGL coverage for negligence, see 7A APPLEMAN, supra note 18, § 4492.03, at 3846.

380. The contrary view, that a negligent act cannot be an accident, is nonsense. See id. at 39 n.8. One commentator lucidly stated:

The !J.verage insured is an average man, possessing frailties and prone to carelessness either by act or omission .... [H]e recognizes his imperfections when he insures, and pays for protection from the consequences of careless, as distinguished from immoral, acts. The insurer knows this when it accepts his premiums. He is, accordingly, entitled to that protection-and the minority rule would deprive him of it.

244 Baltimore Law Review [Vol. 27

C. The Sheets Court Correctly Concluded Negligent Misrepresentations Constitute Accidents

Maryland's alignment with the minority regarding whether neg­ligent misrepresentation constitutes an accident is another step in the court of appeals's continuing trend towards construing policies in favor of the insured.381 However, the Sheets court did not rely on this rule of construction.382 Instead, the court painstakingly reviewed its precedent and concluded that a negligent misrepresentation, like ordinary negligence, constitutes an accident if the resulting harm was neither expected nor intended from the standpoint of the in­sured.383 Viewed in isolation, this conclusion is in step with the rea­sonable expectations of the prudent layperson.384

Jurisdictions in the majority should re-examine their position regarding whether negligent misrepresentations constitute acci­dents. What happens, for example, if a guest injures himself by div­ing into a pool in reliance on the owner's negligent misrepresenta­tion that the pool is twenty feet deep, when in fact it is five?385 The intentional aspect of the negligent misrepresentation-intending to induce reliance-would not transform the act into an intentional act meant to be excluded under eGLs. As the Sheets court correctly noted, so long as the speaker neither expected nor intended the re­sulting harm, a negligent misrepresentation constitutes an acciden t. 386

D. CGL Provisions That Could Enable Practitioners to Circumvent or Re­inforce Sheets

Prudent practitioners will note that the Sheets court did not ad­dress certain provisions contained in eGLs, including the eGL con-

Id. 381. See, e.g., Sullins v. Allstate Ins. Co., 340 Md. 503, 667 A.2d 617 (1995) (constru­

ing a pollution exclusion clause to not preclude coverage for lead-based paint claims).

382. See generally Sheets, 342 Md. at 654-58, 679 A.2d at 550-51. 383. See id. 384. See generally, Bausch & Lomb Inc. v. Utica Mut. Ins. Co., 330 Md. 758, 779, 625

A.2d 1021, 1031 (1993) (noting that policy terms should be read to effectuate expectations of reasonably prudent layperson).

385. Cj, e.g., Virginia Dare Stores, Inc. v. Schuman, 175 Md. 287, 294, 1 A.2d 897, 900 (1938) (addressing a case where person injured himself because he relied on the misrepresentation that a display case was sturdy enough to support his weight).

386. See Sheets, 342 Md. at 657, 679 A.2d at 551.

1997] Sheets v. Brethren Mutual 245

strued in Sheets,387 that could enable insurers or insureds to either circumvent or reinforce the Sheets holdings. Two standard provisions can be successfully invoked to circumvent the Sheets court's "loss of use" holding. First, as noted above, the Sheets court never consid­ered the loss of use exclusion, which greatly circumscribes the loss of use prong.388 Second, the Sheets court did not address the "prem­ises alienated" exclusion.389 In Stull v. American States Insurance CO.,390 the United States District Court for the District of Maryland, apply­ing Maryland law, held that the premises alienated exclusion, which every CGL since 1943 contains,391 operates to exclude negligent mis­representation claims based on the sale of the insured's real property.392

Furthermore, the Sheets court did not address a third exclusion, the "owned property" exclusion, that may also be invoked to cir­cumvent the Sheets "loss of use" holding.393 In Allstate Insurance Co. v. Chaney,394 the United States District Court for the Northern District of California held that even if negligent misrepresentation in the sale of the home amounted to property damage, the owned prop­erty exclusion precluded recovery because the representation oc­curred while the insured seller still owned the property.395

Conversely, the Sheets court did not address a provision that may provide an alternative ground to reach the result of the Sheets court's holding that negligent misrepresentations can constitute an accident. In American States Insurance Co. v. Canyon Creek,396 the United States District Court for the Northern District of California

387. See Joint Record Extract at 88-93, Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 679 A.2d 540 (1996) (No. 9547) (providing selected excerpts of the CGL at issue).

388. See supra notes 372-74 and accompanying text. 389. See supra notes 241-51 and accompanying text for a discussion of the "prem­

ises alienated" exclusion. 390. 963 F. Supp. 492 (D. Md. 1997) (applying Maryland law). For a discussion of

Stull, see supra notes 244-51 and accompanying text. 391. See Tinker, supra note 11, at 278. 392. See Stull, 963 F. Supp. at 494 (adopting the reasoning in Reliance Ins. Co. v.

Povia-Ballantine Corp., 738 F. Supp. 523 (S.D. Ga. 1990». 393. See supra notes 252-57 and accompanying text for a discussion of the owned

property exclusion. 394. 804 F. Supp. 1219 (N.D. Cal. 1992) (Armstrong,].). For a discussion of Chaney,

see supra notes 255-57. 395. See Chaney, 804 F. Supp. at 1223. 396. 786 F. Supp. 821 (N.D. Cal. 1991) (Orrick, J.). For a discussion of Canyon

Creek, see supra notes 274-78 and accompanying text.

246 Baltimore Law Review [Vol. 27

held that despite its conclusion that negligent misrepresentation does not constitute an accident, negligent misrepresentations are covered under the CGL via the BFE advertising injury endorsement, which includes "unfair competition. "397 Notably, however, the CGL has incorporated the BFE advertising injury endorsement as part of the CGL proper since 1986, conspicuously omitting the term "unfair competition. "398

That the insurer in Sheets failed to raise applicable exclusions­and that the court did invoke them as part of construing the policy as a whole-demonstrates the reality that few people read the entire CGL. Because public policy goals woven into specialized rules of construction engulf insurance law, coverage disputes often center on fact-specific, complex case law that lawyers and judges must me­thodically analyze.399 Too much emphasis on precedent, however, can result in overlooking provisions that moot case law. Thus, be­cause contract law governs insurance law, the first place to start is the language of the policy.

E. Impact of Sheets

As the United States Supreme Court recognized, the Sheets decision appreciably enlarged the scope of coverage afforded under CGLs in Maryland.4°O Most significantly, the Sheets court's dicta providing that negligent acts can constitute an accident clarifies a murky area of Maryland insurance law.401 In this respect, insured defendants will enjoy the scope of coverage both parties intended.402 Likewise, the Sheets holding that negligent misrepresentations can constitute an accident logically flows from the same reasoning that ordinary negli-

397. See id. at 827. 398. See supra notes 271-73 (explaining the history of the advertising injury en­

dorsement) . 399. See generally Hartwick, supra note 25, at 175 ("An insurance policy is, of course,

a contract; but it is no longer possible to approach an insurance problem sim­ply by resorting to the law of contracts. A substantial body of law has devel­oped which is particularly applicable to contracts of insurance, and different from that applicable to contracts generally.").

400. See Lords Landing Village Condominium Council of Unit Owners v. Continen­tal Ins. Co., 117 S. Ct. 1731, 1733 (1997) (per curiam) (remanding an insur­ance coverage dispute case back to the United States Court of Appeals for the Fourth Circuit in light of Sheets).

401. See supra notes 133-75 and accompanying text for a discussion of the court of appeal's treatment of the term "accident."

402. See supra notes 24-47 and accompanying text (discussing policy construction).

1997] Sheets v. Brethren Mutual 247

gence can constitute an accident. The fact that negligence takes the form of speech is completely irrelevant.

Conversely, the court's isolated and piecemeal approach to ana­lyzing the loss of use prong erroneously enlarged the scope of the duty to defend.403 Indeed, the CGL in Sheets explicitly excluded the property damage alleged in the underlying complaint via two exclu­sions: the loss of use and premises alienated exclusions.404 By engag­ing in isolated construction of policy terms, the Sheets court ex­panded the potentiality rule to trigger the duty to defend in suits that do not seek damages covered under the policy.405

Likewise, the Sheets court ignored the obvious conflict between finding that the policy did not cover economic loss, which the plaintiffs in the underlying suit sought, and still finding coverage.406

The court's construction of the term "loss of use" essentially swal­lowed the general limitation against covering economic 10SS.407 The ramification of this construction could prove unfairly costly for in­surance coffers.408 If the Sheets reasoning is taken to its logical con­clusion, the progeny of Sheets might again construe liability policies as generally providing coverage for economic loss. Economic loss is the stuff of professional malpractice insurance, not a risk protected against under a CGL.409

403. But see generally Pacific Indem. Co. v. Interstate Fire & Cas. Co., 302 Md. 383, 388, 488 A.2d 486, 488 (1985) (noting that insurance contracts are to be con­strued as a whole).

404. A third exclusion, the owned property exclusion, may have also precluded coverage. See supra note 395 and accompanying text.

405. But see supra notes 52-60 (discussing the potentiality rule). 406. Cf Bailer v. Erie Ins. Co., 344 Md. 515, 536, 687 A.2d 1375, 1385 (1997)

(Chasanow, j., dissenting) (stating the Bailer majority ignored a specific policy limitation). In Bailer, the majority held that an insurer was obligated to defend and indemnify its insured for invasion of privacy under a policy that covered invasion of privacy as "personal injury," despite that the policy excluded "'personal injury ... expected or intended' by the insured." [d. at 517, 687 A.2d at 1376. The Bailer court reasoned: "If the exclusion totally swallows the insuring provision, the provisions are completely contradictory." [d. at 525, 687 A.2d at 1380.

407. Cf id. at 525, 687 A.2d at 1380.. / 408. Cf Keville, supra note 3, at 922 (noting judicial misconstruction of policies has

unilaterally expanded insurers' risk, causing some companies to fail). / 409. See Allstate Ins. Co. v. Morgan, 806 F. Supp. 1460, 1464 (N.D. Cal. 1992) ("In

general, the claims alleged in the [underlying] complaint are simply not the type of claims that the homeowner's policy was designed to cover."); cf. IA Constr. Corp. v. T & T Surveying, Inc., 822 F. Supp. 1213, 1215 (D. Md. 1993) ("This is the stuff of the construction trade (and of professional malpractice

248 Baltimore Law Review [Vol. 27

Since the Sheets opinion, the Court of Special Appeals of Mary­land decided Woodfin Equities Corp. v. Harford Mutual Insurance CO.410 The Woodfin decision, which was reversed on technical grounds, contains a lucid discussion, analysis, and application of the loss of use prong. The Woodfin court precisely delineated between property damage covered by the loss of use prong and property damage ex­cluded under the various policy exclusions. When faced with con­struing the loss of use prong again, the court of appeals should con­sider adopting the court of special appeals's reasoning in Woodfin.411

v. CONCLUSION

The Sheets decision marks a departure from the rules of con­struction governing insurance contracts under Maryland law. 412

Moreover, the court's conclusion regarding whether the claim against the Sheetses alleged property damage covered under the CGL lacks sound support.413 The court did not make the prescribed inquiry when it construed the term "loss of use," a term that has not been addressed by controlling authority.414 Instead, the court undertook an isolated, piecemeal approach to analyzing the term, thereby overlooking two exclusions-the loss of use and premises alienated exclusions-that precluded coverage.415 By contravening

insurance), not a risk protected against by a general liability policy."). See supra notes 169-75 for discussion of1A Construction Corp.

410. 110 Md. App. 616,678 A.2d 116 (1996) '(Wilner, CJ., joining majority opin­ion), reu'd in part on other grounds, 344 Md. 399, 415, 687 A.2d 652, 659 (1997) (reversing the portion of the court of special appeals's opinion addressing merits; declining to address merits itself because the trial court did not issue a written declaratory judgment). For an in-depth discussion of Woodfin, see supra notes 117-32.

411. Judge Wilner, who was Chief Judge of the Court of Special Appeals of Mary­land when Woodfin was decided, joined the court of special appeals's majority opinion in Woodfin. See id. (Wilner, CJ., joining majority opinion). In 1997, Judge Wilner was appointed to the Court of Appeals of Maryland.

412. See supra notes 2447 and accompanying text for discussion of rules governing construction of insurance policies. See supra notes 48-80 al\d accompanying text for discussion of the rules for determining an insurer'!! duty to defend.

413. See supra notes 95-98 and accompanying text (noting the majority of courts and commentators find the loss of use prong has an extremely narrow appli­cation) .

414. See supra note 33 and accompanying text (quoting test applied to new policy terms under Maryland law).

415. See generally Teamsters Local 639-Employers Health Trust v. Reliable Delivery Serv., Inc., 42 Md. App. 485, 488-89, 401 A.2d 191, 194 (1979) (noting that pol­icies should be construed as a whole). A third exclusion, the owned property

1997] Sheets v. Brethren Mutual 249

firmly rooted rules of construction, the Court of Appeals of Mary­land has placed a judicial gloss on the definition of the term "loss of use" which plunges this area of law into the reincarnated, dreaded Serbonian Bog,416 throwing CGL insurers back into the bus­iness of insuring against excluded economic 10ss.417

Conversely, the Sheets court made a needed clarification in the area of ordinary negligence.418 The court's dicta, that negligent acts can constitute an accident if the resulting harm is neither expected nor intended by the insured,419 effectuates the reasonable expecta­tions of the reasonably prudent layperson.42o The court's conclusion that negligent misrepresentations are also accidents if the resulting harm is neither expected nor intended by the insured is, likewise, in accord with reasonable expectations.421

Gregory T. Lawrence

exclusion, may also have been overlooked. See supra note 395 and accompany­ing text.

416. See supra note 144 (explaining the Serbonian Bog reference). This would not be the first time the Serbonian Bog was reincarnated. See generally John D. Frederick, Remarks Delivered on the Occasion of the Presentation of the Fordham-Stein Award to the HonMable William Hughes Mulligan, 59 FORDHAM L. REv. 479. 483 (1991) (quoting Judge Mulligan's reply to questions regarding his use of the obscure Serbonian Bog reference in opinions (" [Nobody knows] what it means, but they know it isn't good .... "».

417. See supra note 87-93 and accompanying text (chronicling history of redrafting CGL to thwart judicial construction encompassing coverage for economic loss) .

418. See supra note 331 and accompanying text (noting two contradictory defini­tions of "accident" in pre-Sheets precedent).

419. See Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 652, 679 A.2d 545, 548 (1996).

420. See generally, e.g., Bausch & Lomb, Inc. v. Utica Mut. Ins. Co., 330 Md. 758, 799, 625 A.2d 1021, 1031 (1993) (noting that under Maryland law, terms should be construed to effect reasonable expectations of prudent layperson).

421. See generally id.